TEST BANK CHAPTER 1 Intercorporate Investments: An Overview MULTIPLE CHOICE 1.
Topic: Accounting for equity securities with no significant influence LO 1 A company invests $350,000 in equity securities on November 30, 2023, and classifies them as investments with no significant influence. At December 31, 2023, the company’s year-end, the securities have a fair value of $345,000. On February 1, 2024, the company sells the securities for $360,000. Which statement is true regarding how this information is reported in the company’s financial statements? a. b. c. d. ANS:
2.
The company’s December 31, 2023 balance sheet reports the securities at $350,000, and a loss of $5,000 is reported on the 2023 income statement. The company’s December 31, 2023 balance sheet reports the securities at $345,000, and a gain of $10,000 is reported on the 2024 income statement. The company’s December 31, 2023 balance sheet reports the securities at $345,000, and a gain of $15,000 is reported on the 2024 income statement. The company’s December 31, 2023 balance sheet reports the securities at $350,000, and no gain or loss appears on the 2023 income statement. c
Topic: Accounting for equity securities with no significant influence LO 1 Which statement is true concerning the reporting for equity investments with no significant influence? a. b. c. d.
They are reported at fair value, with any changes in value reported in income. They are categorized as either trading or available-for-sale, with unrealized changes in the value of trading securities reported in income, and unrealized changes in the value of AFS securities reported in OCI. They are reported at cost, with unrealized changes in value reported in OCI. They are reported at fair value, with unrealized changes in value reported in OCI.
ANS:
a
Test Bank, Chapter 1
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Use the following information on a company’s investments in equity securities with no significant influence to answer Questions 3 and 4. The company’s accounting year ends December 31. Investment Colt Company stock Dana Company stock 3.
4.
5.
Date of Acquisition 9/20/23 10/2/23
Cost $38,000 14,000
Fair Value 12/31/23 $37,000 14,200
Date Sold 2/10/24 1/17/24
Selling Price $42,000 13,000
Topic: Accounting for equity investments with no significant influence LO 1 What amount is reported for gain or loss on these securities in 2023 income? a. b. c. d.
No gain or loss $800 loss $3,000 gain $1,000 loss
ANS:
b ($37,000 – $38,000) + ($14,200 – $14,000) = $800 loss
Topic: Accounting for equity investments with no significant influence LO 1 What amount is reported for gain or loss on these securities in 2024 income? a. b. c. d.
No gain or loss $3,000 gain $3,800 gain $4,000 gain
ANS:
c ($42,000 – $37,000) + ($13,000 – $14,200) = $3,800 gain
Topic: Accounting for equity investments with no significant influence LO 1 A company buys an equity investment for $100 in 2024. The investment has no significant influence. At the end of 2024, the company still holds the investment and it has a market value of $105. In 2025, the company sells the investment for $115. How is this information reported in the company’s 2024 and 2025 income statements? a. b. c. d.
$5 gain on the 2024 income statement; $10 gain on the 2025 income statement. Does not appear on the 2024 income statement; $15 gain on the 2025 income statement. Does not appear on the 2024 income statement; $10 gain on the 2025 income statement. $15 gain on the 2024 income statement; does not appear on the 2025 income statement.
ANS:
a $105 - $100 = $5 gain in 2024; $115 - $105 = $10 gain in 2025.
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Advanced Accounting, 5th Edition
6.
Topic: Accounting for equity investments with no significant influence LO 1 On December 20, 2024, a company pays $40,000 for an investment in equity securities with no significant influence. On December 31, 2024, the company’s year-end, the stock has a market value of $37,000. The company sells the stock in 2025 for $44,000. On its income statement, the company reports:
7.
8.
a. b. c. d.
A loss of $3,000 in 2024, and a gain of $7,000 in 2025 No gain or loss in 2024, and a gain of $4,000 in 2025 A gain of $4,000 in 2024, and no gain or loss in 2025 No gain or loss in 2024, and a gain of $7,000 in 2025
ANS:
a ($37,000 - $40,000) = $3,000 loss in 2024; ($44,000 - $37,000) = $7,000 gain in 2025.
Topic: Accounting for equity investments with no significant influence LO 1 On October 25, 2024, a company pays $35,000 for an investment in equity securities, with no significant influence. On December 31, 2024, the company’s year-end, the stock has a market value of $36,000. The company sells the stock in 2025 for $32,000. How is the company’s 2024 other comprehensive income affected by the above transactions in each year? a. b. c. d.
Decrease of $2,000 in 2024, increase of $2,000 in 2025 Decrease of $2,000 in 2024, increase of $4,000 in 2025 No effect in 2024, increase of $2,000 in 2025 No effect on OCI in either year.
ANS:
d
Topic: Accounting for equity investments with no significant influence LO 1 A company has equity investments with no significant influence, purchased for $550,000 and carried at $520,000 at the beginning of 2024. At the end of 2024, the investments have a fair value of $560,000 and are still held by the company. What amount is reported in income and in other comprehensive income for 2024? a. b. c. d. ANS:
Income $0 $40,000 gain $10,000 gain $0
OCI $40,000 gain $0 $0 $10,000 gain
b $560,000 - $520,000 = $40,000 gain for 2024, reported in income.
Test Bank, Chapter 1
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Use the following information on a company’s investments in debt securities to answer Questions 9 - 13. The company’s accounting year ends December 31. Investment Colt Company bonds Dana Company bonds 9.
10.
11.
Date of Acquisition 9/20/23 10/2/23
Cost $38,000 14,000
Fair Value 12/31/23 $37,000 14,200
Date Sold 2/10/24 1/17/24
Selling Price $42,000 13,000
Topic: Accounting for debt investments classified as trading LO 1 If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2023 income? a. b. c. d.
No gain or loss $800 loss $3,000 gain $200 gain
ANS:
b ($37,000 - $38,000) + ($14,200 - $14,000) = $(800) loss
Topic: Accounting for debt investments classified as trading LO 1 If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2024 income? a. b. c. d.
No gain or loss $3,000 gain $3,800 gain $5,000 gain
ANS:
c ($42,000 - $37,000) + ($13,000 - $14,200) = $3,800 gain
Topic: Accounting for debt investments classified as AFS LO 1 If the above investments are categorized as available-for-sale securities, what amount is reported for gain or loss on securities in 2023 income? a. b. c. d.
No gain or loss $800 loss $3,000 gain $200 gain
ANS:
a
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Advanced Accounting, 5th Edition
12.
13.
14.
Topic: Accounting for debt investments classified as AFS LO 1 If the above investments are categorized as available-for-sale securities, what amount is reported as gain or loss on securities in 2024 income? a. b. c. d.
$3,000 gain $3,800 gain $2,100 gain $3,100 gain
ANS:
a ($42,000 – $38,000) + ($13,000 – $14,000) = $3,000 gain
Topic: Accounting for debt investments classified as AFS LO 1 If the above investments are categorized as available-for-sale securities, what is the net effect on 2024 other comprehensive income? a. b. c. d.
$0 $3,800 increase $ 800 decrease $ 800 increase
ANS:
d Reclassification of 2023 unrealized loss.
Topic: Accounting for debt investments classified as trading LO 1 A company has investments in debt securities, acquired at a cost of $300,000, and classified as trading investments. At the beginning of the year, the investments are reported at $340,000. During the year the company sells the investments for $335,000. What amount is reported in income for the year? a. b. c. d.
$35,000 gain $ 5,000 gain $ 5,000 loss $40,000 gain
ANS:
c $335,000 - $340,000 = $5,000 loss
Test Bank, Chapter 1
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15.
Topic: Accounting for debt investments classified as AFS LO 1 A company has investments in debt securities, classified as available-for-sale. At the beginning of the year, the investments are reported at $500,000, and unrealized gains of $30,000 are reported in accumulated other comprehensive income. During the year, the company sells the securities for $490,000. What amounts are reported in income and in other comprehensive income for the year? a. b. c. d. ANS:
Income $20,000 gain $10,000 loss $30,000 gain $30,000 gain
OCI $30,000 loss $0 $30,000 loss $0
a The entry to record the sale is: Cash Reclassification of gain (OCI)
490,000 30,000 Investment in AFS securities Gain (income)
16.
500,000 20,000
Topic: Accounting for debt investments classified as AFS LO 1 A company buys corporate bonds for $100 in 2023. At the end of 2023, the company still holds the investment and it has a market value of $115. In 2024, the company sells the investment for $108. How is this information reported in the company’s 2023 and 2024 income statements if the investment is classified as an AFS investment? a. b. c. d. ANS:
$15 gain on the 2023 income statement; $7 loss on the 2024 income statement Does not appear on the 2023 income statement; $8 gain on the 2024 income statement Does not appear on the 2023 income statement; $7 loss on the 2024 income statement $8 gain on the 2023 income statement; does not appear on the 2024 income statement b $108 - $100 = $8 gain
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Advanced Accounting, 5th Edition
17.
Topic: Accounting for debt investments classified as AFS LO 1 A company invests $500,000 in corporate bonds on April 30, 2024 and classifies them as availablefor-sale securities. At December 31, 2024, the company’s year-end, the securities have a fair value of $515,000. On February 1, 2025, the company sells the securities for $510,000. Which statement is true regarding how is this information reported in the company’s financial statements? a. b. c. d. ANS:
18.
The company’s 2024 balance sheet reports the securities at $515,000 and a gain of $15,000 is reported in 2024 other comprehensive income. The company’s 2024 balance sheet reports the securities at $500,000 and a gain of $10,000 is reported on the 2025 income statement. The company’s 2024 balance sheet reports the securities at $515,000 and a gain of $10,000 is reported in 2025 other comprehensive income. The company’s 2024 balance sheet reports the securities at $500,000 and no gain or loss appears in the 2024 financial statements. a
Topic: Accounting for debt investments classified as AFS LO 1 A company invests $700,000 in corporate bonds in 2023 and classifies them as available-for-sale. At the end of 2023, the fair value of the securities is $650,000. In 2024, the company sells the bonds for $706,000. Which statement is true concerning the entry made to record the sale of the bonds in 2024? a. b. c. d.
Other comprehensive income increases by $50,000 and income increases by $6,000. There is no effect on other comprehensive income, and income increases by $6,000. Other comprehensive income declines by $50,000, and income increases by $6,000. Other comprehensive income increases by $6,000, and there is no effect on income.
ANS:
a The 2024 entry to record the sale is as follows: Cash
706,000 Reclassification of loss (OCI) Investment in AFS securities Gain (income)
Test Bank, Chapter 1
50,000 650,000 6,000
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19.
Topic: Impairment of debt investments classified as AFS LO 1 A company paid $100,000 for corporate bonds and classified them as AFS. By year-end, the bonds declined in value to $80,000 due to credit losses. Which statement is true concerning the end-ofyear adjustment for this investment? a. b.
No adjustment is required. The investment account is directly reduced by $20,000 and a $20,000 loss is reported in OCI. The investment account is directly reduced by $20,000 and a $20,000 loss is reported in income. An allowance account is created to reduce the investment by $20,000, and a $20,000 loss is reported in income.
c. d. ANS: 20.
d
Topic: Impairment of debt investments classified as AFS LO 1 Last year, a company paid $80,000 for corporate bonds and classified them as AFS. At the beginning of the current year, these bonds are carried at $85,000. At year-end, their market value is $60,000, due to credit losses. Which statement is true concerning the end-of-year adjustment for this investment? a. b. c. d.
No adjustment is required. OCI is reduced by $5,000. An impairment loss of $25,000 is reported in income. The investment account is reduced by $20,000.
ANS:
b
The adjusting entry is as follows: Reclassification of gain on AFS securities (OCI) Impairment loss on AFS securities (income) Investment in AFS securities Allowance for credit losses
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5,000 20,000 5,000 20,000
Advanced Accounting, 5th Edition
21.
Topic: Impairment of debt investments classified as AFS LO 1 A U.S. company holds available-for-sale debt securities, purchased for $1,000,000 and carried at $1,500,000. At the end of the current year, the company determines that the fair value of these securities is $1,300,000, and the decline in value is due to an increase in the market rate of interest. How will the adjusting entry to record the decline in value affect income and other comprehensive income? a. b. c. d. ANS:
Income $300,000 loss $200,000 loss No effect No effect
OCI No effect No effect $200,000 loss $300,000 loss
c There is no impairment loss since market value is greater than cost. The entry to record the decline in value is: OCI
200,000 Investment in AFS securities
22.
200,000
Topic: Impairment of debt investments classified as AFS LO 1 A U.S. company holds an investment in debt securities, classified as available-for-sale. Unrealized investment gains have been reported in previous years. During the current year, the market value of the investment declines below cost, due to a rise in market interest rates. Which statement below is true concerning this investment? a. b. c. d.
The difference between cost and market value is reported in income as a loss. The difference between cost and market value is reported in OCI as a loss. The difference between carrying value and market value is reported in income as a loss. The difference between carrying value and market value is reported in OCI as a loss. ANS:
Test Bank, Chapter 1
d
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23.
Topic: Impairment of debt investments classified as AFS LO 1 A company purchases corporate bonds for $1,000,000 and categorizes them as AFS. At yearend, their market value is $750,000. $100,000 of the decline in value is attributed to a rise in market interest rates, and $150,000 of the decline is attributed to credit losses. Which statement below is true concerning the entry to record the decline in value? a. b. c. d.
The investment account, net of its allowance for losses, declines by $100,000. An impairment loss of $150,000 is reported in income. The investment account is directly reduced by $150,000. An impairment loss of $100,000 is reported in income.
ANS:
b The entry to record the impairment loss is: Impairment loss (income) Impairment loss (OCI)
150,000 100,000 Allowance for credit losses Investment in bonds
24.
150,000 100,000
Topic: Impairment of debt investments classified as AFS LO 1 A company holds available-for-sale corporate bonds purchased for $100,000. Current value of these securities is $92,000 and the decline in value was recorded as a debit to OCI and a credit to the investment account when the decline occurred. The company determines that the decline in value is due to credit losses. Which statement is true concerning the adjusting entry needed to record this information? a. b. c. d.
Debit loss on securities (income) and credit OCI for $8,000. Debit OCI and credit investments for $8,000. Debit OCI and credit allowance for credit losses for $8,000. No entry is made since the securities are already reported at $92,000.
ANS:
a The adjusting entry is: Impairment loss (income) Investment in AFS securities
8,000 8,000 Reclassification of loss (OCI) Allowance for credit losses
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8,000 8,000
Advanced Accounting, 5th Edition
25.
Topic: Impairment of debt securities classified as AFS LO 1 A company holds an investment in corporate bonds classified as available-for-sale. At the beginning of the year, this investment is reported at a value of $4,000,000. Gains of $500,000 have been previously reported, and no impairment losses have been reported. At the end of the year, the market value of the investment is $2,000,000, and it is determined that the decline in value is due to credit losses. How is this information reported in the company’s financial statements for the year? a. b. c. d.
$500,000 other comprehensive loss; $1,500,000 loss in income $2,000,000 loss in income; no change in other comprehensive income $2,000,000 other comprehensive loss; not reported in income $1,500,000 other comprehensive loss; not reported in income
ANS:
a The entry to record the impairment loss is: Reclassification of gain on AFS securities (OCI) Impairment loss (income) Investment in AFS securities Allowance for credit losses
26.
500,000 1,500,000
Topic: Impairment testing of debt securities classified as AFS LO 1 An AFS debt security’s market value is less than its original cost. The loss is reported in income when: a. b.
d.
Current market value is at least 50% below cost. Current market value is below cost, and it is more likely than not that the investor will sell it before the loss is recovered. Current market value is below carrying value and the decline is due to increases in market interest rates. Current market value is below carrying value.
ANS:
b
c.
27.
500,000 1,500,000
Topic: Impairment of debt securities classified as AFS LO 1 A company has previously recorded in income an impairment loss on debt securities classified as AFS. What can we conclude from this information? a. b. c. d.
The loss is attributed to an increase in market rates of interest. The loss is attributed to a decline in the ability of the investee to meet required principal and interest payments. The amount of the impairment loss directly reduced the investment account. The loss was originally recorded in OCI.
ANS:
b
Test Bank, Chapter 1
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Use the following information to answer Questions 28-30: A company holds a $100,000 face value corporate bond, bought January 1, 2023, paying 3% annually on December 31, and maturing December 31, 2025. The company paid $102,884 for the bond, to yield 2%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31. Round answers to the nearest dollar. 28.
29.
Topic: Accounting for HTM securities LO 1 What amount will the company report as interest revenue on the bond for 2024? a. b. c. d.
$3,000 $2,058 $2,039 $2,000
ANS:
c 2023 investment amortization = (3% x $100,000) – (2% x $102,884) = $942 2024 interest revenue = ($102,884 – $942) x 2% = $2,039
Topic: Accounting for HTM securities LO 1 What is the approximate net entry to record receipt of interest and principal on December 31, 2025, assuming no impairment on the bond throughout its life? a.
Cash
b.
Cash
c.
Cash
d.
Cash
ANS:
a 2023 investment amortization = (3% x $100,000) – (2% x $102,884) = $942; new investment balance = $102,884 – $942 = $101,942 2024 investment amortization = (3% x $100,000) – (2% x $101,942) = $962; new investment balance = $101,942 – $962 = $100,980 2025 interest revenue = 2% x $100,980 = $2,020 Small discrepancy due to rounding to nearest dollar.
Interest revenue Investment in bond Interest revenue Investment in bond Interest revenue Investment in bond Interest revenue Investment in bond
©Cambridge Business Publishers, 2023 1-12
103,000
103,000
102,000
103,000
2,020 100,980 3,000 100,000 2,000 100,000 116 102,884
Advanced Accounting, 5th Edition
30.
Topic: Impairment of HTM securities LO 1 Assume the market value of the bond on December 31, 2023 is $70,000, and no previous impairment has been reported. The decline in value is due to credit losses. What impairment loss is reported on the company’s 2023 income statement? a. b. c. d.
$30,000 $32,884 $31,942 $27,000
ANS:
c Amortized cost (book value) at the end of 2023, after interest revenue is recorded, is $101,942. Therefore, the impairment loss is $70,000 – $101,942 = $31,942, reported in income.
Use the following information to answer Questions 31 – 33: On January 1 of the current year, Ola Company paid $405,000 for a $400,000 face value 3% corporate bond yielding 2.8%, interest paid annually on December 31, and classified it as held-to-maturity. No impairment losses are reported. Ola’s reporting year ends December 31. 31.
32.
Topic: Accounting for HTM securities LO 1 On its income statement for the current year, Ola reports interest revenue on the corporate bond of: a. b. c. d.
$12,000 $11,200 $12,340 $11,340
ANS:
d 2.8% x $405,000 = $11,340
Topic: Accounting for HTM securities LO 1 On its balance sheet as of the end of the current year, Ola reports the investment at: a. b. c. d.
$400,000 $405,000 $404,340 $405,660
ANS:
c $405,000 + [$11,340 – (3% x $400,000)] = $404,340
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-13
33.
34.
35.
Topic: Accounting for HTM securities LO 1 On its balance sheet as of the end of the following year, Ola reports the investment at: a. b. c. d.
$406,338 $403,662 $403,680 $400,000
ANS:
b $404,340 + [($404,340 x 2.8%) – (3% x $400,000)] = $403,662
Topic: Accounting for HTM securities LO 1 A company invests in a 5-year debt security at a discount. The security is classified as HTM. Using the effective interest method, the company will report interest revenue on this security that is: a. b. c. d.
Increasing over the years Decreasing over the years Equal each year Decreasing in the first and second year and increasing in the remaining years
ANS:
a
Topic: Accounting for HTM securities LO 1 A company invests in a 5-year debt security and classifies it as HTM. Market rates of interest for this type of investment decline while the company holds the security. Which statement is true? a. b.
d.
The company reports an unrealized loss on its income statement. The investment balance reported on the balance sheet is higher than the investment’s market value. The investment balance reported on the balance sheet is lower than the investment’s market value. The company reports an unrealized gain in OCI.
ANS:
c
c.
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Advanced Accounting, 5th Edition
36.
37.
38.
Topic: Impairment of HTM investments LO 1 A held-to-maturity debt investment with a carrying value of $5,000,000 is determined to be impaired due to concerns about the investee’s ability to pay principal and interest. The investment’s current market value is $4,000,000. The bonds were originally sold at par. Which statement is true? a. b. c. d.
A $1,000,000 loss is reported in OCI. A $1,000,000 loss is reported in income. No loss is reported. The investment account is directly reduced by $1,000,000.
ANS:
b
Topic: Impairment testing of investments LO 1 Which investments in debt securities and equity securities with no significant influence must be tested for impairment, if the investor does not elect the fair value option? a. b. c. d.
All Trading and AFS debt securities and HTM securities AFS and HTM debt securities Equity securities
ANS:
c
Topic: Accounting for debt investments LO 1 Which unrealized gain affects a company’s earnings per share, if the investor does not elect the fair value option? a. b. c. d.
Unrealized gain on HTM securities Unrealized gain on trading debt securities Unrealized gain on AFS debt securities Unrealized gain on trading and AFS debt securities
ANS:
b
Use the following information to answer questions 39-42: Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 at the beginning of the current year. At the time, the book value of Fenton was $20,000,000. During the year, Fenton reported net income of $2,400,000 and other comprehensive income of $100,000. Fenton did not declare any dividends. Both companies have December 31 year-ends, and the fair value of the investment at yearend was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-15
39.
40.
41.
Topic: Equity method investments LO 2 What is the investment balance on Exeter’s balance sheet at the end of the year? a. b. c. d.
$7,000,000 $7,875,000 $9,000,000 $8,050,000
ANS:
b $7,000,000 + [35% x ($2,400,000 + $100,000)] = $7,875,000
Topic: Equity method investments LO 2 Now assume Fenton’s book value at the date of acquisition was $16,000,000, and the excess paid over book value is attributed to previously unrecorded intangibles with an estimated remaining life of five years. Straight-line amortization is appropriate. What amount does Exeter report on its income statement as equity in net income of Fenton for the year? a. b. c. d.
$ 560,000 $2,400,000 $ 525,000 $ 840,000
ANS:
a Intangibles = $7,000,000 – (35% x $16,000,000) = $1,400,000 Amortization = $1,400,000/5 = $280,000 ($2,400,000 x 35%) – $280,000 = $560,000
Topic: Equity method investments LO 2 Assume the same information as in question 40. What is the investment balance at the end of the year, reported on Exeter’s balance sheet? a. b. c. d.
$7,560,000 $7,595,000 $7,875,000 $7,000,000
ANS:
b $7,000,000 + $560,000 + (35% x $100,000) = $7,595,000
©Cambridge Business Publishers, 2023 1-16
Advanced Accounting, 5th Edition
42.
43.
44.
Topic: Equity method investments LO 2 Now assume Exeter’s ending inventory for the year contains $150,000 in merchandise purchased from Fenton, at a markup of 25% on cost. What is the impact on Exeter’s reported equity in net income for the year? a. b. c. d.
$10,500 lower $37,500 lower $52,500 lower None
ANS:
a [$150,000 – ($150,000/1.25)] x 35% = $10,500
Topic: Equity method investments LO 2 Monroe Company owns 40% of the voting stock of Nartal Industries, acquired at book value. Nartal reports income of $600,000 for the current year. Nartal regularly sells merchandise to Monroe at a markup of 30% on cost. Monroe’s beginning inventory includes $156,000 purchased from Nartal. Its ending inventory includes $260,000 purchased from Nartal. Monroe uses the equity method to report its investment in Nartal. Equity in net income of Nartal for the year is: a. b. c. d.
$249,600 $230,400 $216,000 $264,000
ANS:
b 40% x [$600,000 + ($156,000 – ($156,000/1.3)) – ($260,000 – ($260,000/1.3))] = $230,400
Topic: Equity method investments LO 2 Acton Company uses the equity method to report its investment in 35% of the stock of Bates Company. Its original investment cost exceeded 35% of the book value of Bates by a large amount. Acton is computing equity in net income of Bates for the current year, which is five years after the acquisition. Which situation below is most likely to require Acton to adjust the equity in net income number for the current year, for write-offs of basis differences? Attribute the difference to: a. b. c. d.
Goodwill Inventory reported using FIFO Databases with a 3-year life Plant assets with a 20-year life
ANS:
d
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-17
45.
46.
47.
48.
Topic: Equity investments LO 2 A company has a 25% interest in X Company stock and a 15% interest in Y Company stock. The company is able to exercise significant influence over Y Company’s decisions but not over X Company’s decisions. Which of the two investments should be reported using the equity method? a. b. c. d.
Both X and Y X only Y only Neither X or Y
ANS:
c
Topic: Impairment of equity method investments LO 2 Impairment losses on equity method investments are: a. b. c. d.
Not reported Reported in other comprehensive income Reported as a direct adjustment to beginning retained earnings Reported in income
ANS:
d
Topic: Impairment of equity method investments LO 2 Impairment losses on equity method investments are: a. b. c. d.
Reported in income if considered other than temporary Reversed as gains if the investment’s market value rises Reclassified from OCI to income if the investment’s value rises Not reported.
ANS:
a
Topic: Impairment of equity method investments LO 2 The U.S. GAAP impairment test for equity method investments requires recognition of impairment losses when: a. b. c. d.
Fair value is less than cost and the decline is other than temporary. A significant loss event occurs. Fair value is less than carrying value and the decline in value is other than temporary. Expected credit losses are significant.
ANS:
c
©Cambridge Business Publishers, 2023 1-18
Advanced Accounting, 5th Edition
49.
50.
51.
Topic: Equity method investments LO 2 Equity in net income is affected by all but which one of these items related to the investee? a. b. c. d.
Investee goodwill impairment Markup on inventory sold by the investee to the investor Markup on inventory sold by the investor to the investee Amortization of previously unreported limited life intangibles of the investee
ANS:
a
Topic: U.S. GAAP for equity method investments LO 2 Following U.S. GAAP, when should a company use the equity method to report an intercorporate investment? a. b. c. d.
The company significantly influences the decisions of the investee. The investee is the company’s major supplier. The company owns 20 – 50% of the investee’s voting stock. The company is holding the investment in its long-term portfolio.
ANS:
a
Topic: Equity method investments LO 2 Fizzy Corporation uses the equity method to account for its 25% investment in Organic Juices Company, for which it paid $10 million in excess of its share of Organic Juices’ book value three years ago. In the current year, Organic Juices reports net income of $3 million, and Fizzy reports equity in net income from Organic Juices on its income statement in the amount of $750,000. We can determine from this information that Fizzy most likely attributed the $10 million extra it paid for Organic Juices to: a. b. c. d.
Favorable leaseholds with a 10-year life Technology rights with a 4-year life Bottler franchise rights with indefinite life Goodwill
ANS:
d
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-19
52.
Topic: Equity method investments LO 2 Ajax Beverages holds 40% of the stock of Bubbly Bottler, acquired at a cost equal to 40% of Bubbly’s book value at the time of purchase, and reports the investment using the equity method. At the start of the current year, Ajax reports the investment at a balance of $1,000,000. Bubbly reports net income of $200,000 and $10,000 in other comprehensive losses for the current year. Bubbly also declares $50,000 in dividends. The market value of Ajax’s investment in Bubbly stock increases by $20,000 during the year. At what amount does Ajax report the investment at the end of the year?
53.
a. b. c. d.
$1,076,000 $1,056,000 $1,084,000 $1,020,000
ANS:
b $1,000,000 + 40% x ($200,000 - $10,000 - $50,000) = $1,056,000
Topic: Equity method investments LO 2 Company C has a significant influence investment in Company D, and appropriately reports its share of Company D’s reported income as equity in net income. Under what circumstances will Company C be most likely to adjust Company D’s reported income to determine its share of that income, in the first year the investment is held? a. b. c. d. ANS:
Company D declared and paid dividends in excess of its reported net income in the first year. Company C’s acquisition cost was more than its share of Company D’s book value, and the difference is attributable to indefinite life intangibles that are not impaired. Company D reported a loss in the first year, but its performance is expected to improve. Company C’s acquisition cost was more than its share of Company D’s book value, and the difference is attributable to previously unreported customer lists with a 3-year life. d
©Cambridge Business Publishers, 2023 1-20
Advanced Accounting, 5th Edition
54.
55.
Topic: Equity method investments LO 2 Fizzy Inc. acquired 25% of the stock of Bubbly Inc. several years ago, and reports the investment using the equity method. The basis difference was attributed to goodwill. In the current year, Bubbly reported income of $250,000, other comprehensive losses of $5,000, and declared and paid $100,000 in dividends. Fizzy’s net entry to record this information includes a. b. c. d.
a credit of $61,250 to equity in net income. a credit to cash of $25,000. a credit of $1,250 to equity in OCI. a debit of $36,250 to Investment in Bubbly.
ANS:
d The entry is: Cash Equity in OCL of Bubbly (OCI) Investment in Bubbly Equity in net income of Bubbly (income)
25,000 1,250 36,250 62,500
Topic: Equity method investments LO 2 Fizzy Inc. acquired 25% of the stock of Bubbly Inc. at the beginning of 2022 for $5,000,000, and reports the investment using the equity method. There is no basis difference, and no intercompany transactions. Bubbly’s retained earnings increased by $800,000 in the two years since acquisition, and its AOCI increased by $20,000. Bubbly declared and paid dividends of $300,000 during this time. What amount does Fizzy report for its investment in Bubbly at the end of 2023? a. b. c. d.
$5,130,000 $5,200,000 $5,205,000 $5,125,000
ANS:
c $5,000,000 + 25% x ($800,000 + $20,000) = $5,205,000
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-21
56.
57.
58.
Topic: Equity method investments and investee losses LO 2 Grant Corporation has owned 40% of the voting stock of Halliday Company for many years, originally purchased at book value and reported using the equity method. At the beginning of the current year, the carrying value of the investment is $3,000,000. Halliday reports a loss of $8,000,000 for the year, and the loss is considered other than temporary. What amount should Grant report as equity in the net loss of Halliday for the current year? a. b. c. d.
none $3,000,000 $3,200,000 $8,000,000
ANS:
b 40% x $8,000,000 = $3,200,000, but losses that result in a negative balance for the investment are not reported if they are considered other than temporary.
Topic: Equity method investments and investee losses LO 2 Refer to the information from Question 56. Now assume the following year Halliday unexpectedly reports net income of $1,500,000. What amount should Grant report as equity in the net income of Halliday for the current year? a. b. c. d.
$ 400,000 $ 0 $ 600,000 $1,500,000
ANS:
a Grant’s share of Halliday’s net income is $600,000 (= $1,500,000 x 40%). However, it did not report $200,000 of its share of Halliday’s loss last year. $600,000 - $200,000 = $400,000.
Topic: Change to equity method LO 2 Jackson Corporation owns 10% of the voting stock of Kettering Company and has been reporting it as an equity investment with no significant influence. At the beginning of the current year, the investment has a fair value of $40,000,000. Jackson originally purchased its 10% interest for $30,000,000. Jackson purchases an additional 25% interest in Kettering’s voting stock for $120,000,000, and determines that the equity method is now appropriate. Any basis difference is attributed to goodwill. Kettering reports net income of $800,000 for the current year, and declares and pays $100,000 in dividends. The year-end fair value of Jackson’s 35% interest is $170,000,000. At what amount does Jackson report the investment on its balance sheet? a. b. c. d.
$170,000,000 $150,245,000 $160,280,000 $160,245,000
ANS:
d $40,000,000 + $120,000,000 + [($800,000 - $100,000) x 35%] = $160,245,000
©Cambridge Business Publishers, 2023 1-22
Advanced Accounting, 5th Edition
59.
Topic: Change from equity method LO 2 Teton Corporation has a 25% interest in Glacier Inc. and reports the investment using the equity method. At the beginning of the year, the investment balance is $16,000,000. Teton determines that it has lost its significant influence over Glacier due to changes in its representation on Glacier’s board of directors, and recategorizes the investment as having no significant interest, as of the beginning of the year. Glacier reports income of $1,000,000 for the year, declares no dividends, and has no OCI or AOCI. The fair value of the investment at the beginning of the year is $18,000,000, and fair value at the end of the year is $18,200,000. How is Teton’s income for the current year affected by this investment? a. b. c. d.
$200,000 increase $2,000,000 increase $2,200,000 increase $250,000 increase
ANS: 60.
c $18,200,000 - $16,000,000 = $2,200,000
Topic: Joint ventures LO 2 At the beginning of the year, Fizzy Corporation and Healthy Beverages Company each invest $50,000,000 in a project to market ready-to-drink juices in Europe. Each has a 50% interest in this joint venture. During the year, the joint venture reports income of $1,000,000 and pays dividends of $300,000 in cash. The joint venture’s balance sheet at the end of the year looks like this: Current assets Property and equipment Total
$
500,000 170,200,000 $170,700,000
Liabilities Equity Total
$ 70,000,000 100,700,000 $170,700,000
At what amount will Fizzy report its investment in the joint venture on its balance sheet at the end of the year? a. b. c. d.
$50,500,000 $50,000,000 $50,350,000 $50,700,000
ANS:
c $50,000,000 + [($1,000,000 – $300,000) x 50%] = $50,350,000
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-23
61.
62.
Topic: Joint ventures LO 2 If a U.S. company invests in a joint venture, it reports the investment as: a. b. c. d.
An AFS investment A held-to-maturity investment An equity method investment A merger
ANS:
c
Topic: Impairment testing of investments LO 1, 2 Which statement is true concerning impairment testing of investments in debt and equity securities? a. b. c. d. ANS:
63.
64.
Impairment losses are reported in income for credit losses related to investments in debt and equity securities. Impairment losses are reported in income for other than temporary declines in the value of equity securities with no significant influence and those with significant influence. Impairment testing is required for investments in equity securities with no significant influence and those with significant influence. Impairment testing is required for debt securities classified as AFS or HTM, but not for debt securities classified as trading. d
Topic: Impairment testing of investments LO 1, 2 Fizzy Beverages invests in the debt and equity securities of other companies, and does not elect the fair value option for these investments. Which statement is false concerning impairment testing of these investments? a. b. c. d.
Impairment testing is required for equity investments with no significant influence. Credit losses for AFS debt investments are reported in income. Impairment testing is required for equity method investments. Impairment testing is required for debt investments classified as AFS and HTM.
ANS:
a
Topic: Investments in debt and equity securities LO 1, 2 Fizzy Beverages invests in the debt securities of other companies. Which statement is false concerning reporting standards for these investments? a. b. c. d.
Fizzy can elect to report all of these investments at FV-NI. Interest earned on trading and AFS debt investments reduces the investment balance. AFS debt securities are reported on the balance sheet at fair value. Fizzy reports market-related losses related to AFS investments in OCI.
©Cambridge Business Publishers, 2023 1-24
Advanced Accounting, 5th Edition
ANS: 65.
66.
67.
b
Topic: Investment valuation LO 1, 2, 3 If a company elects the fair value option under ASC Topic 825 for all eligible investments, which of its investments are not reported at fair value, with unrealized gains and losses on the investments reported in income? a. b. c. d.
Significant influence investments Equity investments with no significant influence Held-to-maturity debt investments Controlling investments
ANS:
d
Topic: Stock acquisition LO 3 A company acquires all of the voting stock of Previn Company, and records the transaction by debiting “Investment in Previn Company.” The company is accounting for its investment as a: a. b. c. d.
Consolidation Variable interest entity Joint venture Stock acquisition
ANS:
d
Topic: Consolidation LO 3 Which investment(s) require consolidation of the investee’s assets and liabilities on the investor’s balance sheet? a. b. c. d.
All equity investments Investments where the investor has control over the investee’s operations Investments where the investor lends significant amounts to the investee Investments where the fair value of the investee’s net assets is significant
ANS:
b
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-25
68.
Topic: Controlling investment LO 3 A company acquires all of the assets and liabilities of another company, and reports the acquisition as a merger. Which statement is true? a. b. c. d. ANS:
69.
70.
The acquiring company revalues its own assets and liabilities to fair value at the date of acquisition. The acquiring company does not report acquired intangible assets unless they are already reported on the acquired company’s books. The acquiring company reports the acquired company’s assets and liabilities at fair value at the date of acquisition. The acquired company retains its own books, while the acquiring company reports the acquisition as an investment. c
Topic: Controlling investment LO 3 A company acquires all of the assets and liabilities of another company, and reports the acquisition as a merger. Which one of the following increases the amount of goodwill the acquiring company reports? a. b. c. d.
The acquired company’s equipment is undervalued. Acquisition cost is lower. The acquired company’s debt is undervalued. The acquired company has previously unreported intangible assets other than goodwill.
ANS:
c
Topic: Change to controlling interest LO 3 Porter Corporation holds a 35% interest in the voting stock of Quinn Company, and reports its investment using the equity method. Porter then acquires the remainder of Quinn’s voting stock for cash. Which statement is true concerning Porter’s reporting for the acquisition of the remainder of Quinn’s stock? a. b. c. d. ANS:
Quinn’s assets and liabilities are not revalued to fair value in this transaction. The difference between the fair value and book value of the equity method investment is reported in income. No goodwill is reported in this tranasaction. The cost of the additional 65% of Quinn’s stock is reported as the book value of the equity method investment plus cash paid by Porter. b
©Cambridge Business Publishers, 2023 1-26
Advanced Accounting, 5th Edition
71.
Topic: Change from controlling interest LO 3 Radler Corporation holds all of the voting stock of Spald Company. The carrying value of Spald’s net assets is $20 million. Radler sells 75% of the stock for $18 million. Its remaining investment has a fair value of $5,500,000, and is reported using the equity method. The entry to record the deconsolidation includes a a. b. c. d.
gain of $3.5 million, reported in income. gain of $3.5 million, reported in OCI. loss of $3 million, reported in income. loss of $3 million, reported in OCI.
ANS: a The entry to record the deconsolidation is: Cash Investment in Spald Net assets of Spald Gain on deconsolidation (income)
18,000,000 5,500,000 20,000,000 3,500,000
Use the following information to answer Questions 72 - 74: Peregrine Company merged with Falcon Corporation, paying $50,000,000 for its net assets. Falcon’s balance sheet reports the following asset and liability balances. Treat each question independently. Current assets Plant & equipment Current liabilities Long-term debt 72.
$10,000,000 70,000,000 5,000,000 40,000,000
Topic: Controlling investment LO 3 Assume the book values of Falcon’s assets and liabilities equal their fair values. How much goodwill does Peregrine report at the date of acquisition? a. b. c. d.
$30,000,000 $0 $10,000,000 $15,000,000
ANS:
d $50,000,000 – ($10,000,000 + $70,000,000 – $5,000,000 – $40,000,000) = $15,000,000
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-27
73.
74.
75.
Topic: Controlling investment LO 3 Now assume Falcon’s plant and equipment has a fair value of $60,000,000, but the fair values of its other assets and liabilities equal book value. How much goodwill does Peregrine report at the date of acquisition? a. b. c. d.
$15,000,000 $30,000,000 $25,000,000 None
ANS:
c $50,000,000 – ($10,000,000 + $60,000,000 – $5,000,000 – $40,000,000) = $25,000,000
Topic: Controlling investment LO 3 Now assume the book values of Falcon’s assets and liabilities equal their fair values, but Falcon has unreported technology valued at $8,000,000. How much goodwill does Peregrine report at the date of acquisition? a. b. c. d.
$25,000,000 $ 7,000,000 $17,000,000 None
ANS:
b $50,000,000 – ($10,000,000 + $70,000,000 + $8,000,000 – $5,000,000 – $40,000,000) = $7,000,000
Topic: Controlling investment LO 3 Radcliff Corporation acquires Soulon Company’s assets and liabilities for $20,000,000 in cash. At the date of acquisition, Soulon’s reported assets have a fair value of $50,000,000 and its reported liabilities have a fair value of $47,000,000. Investigation reveals that Soulon has unreported technology with a fair value of $5,000,000. How much goodwill does Porter report on this acquisition? a. b. c. d.
$20,000,000 $17,000,000 $12,000,000 $0
ANS:
c $20,000,000 – ($50,000,000 + $5,000,000 – $47,000,000) = $12,000,000
©Cambridge Business Publishers, 2023 1-28
Advanced Accounting, 5th Edition
76.
77.
78.
Topic: Controlling investment LO 3 Rand Corporation acquires Southern Company’s assets and liabilities for $15,000,000 in cash. At the date of acquisition, Southern’s balance sheet reported net assets of $10,000,000. Investigation reveals that Southern’s reported plant assets are overvalued by $1,400,000. Rand reports how much goodwill on this acquisition? a. b. c. d.
$5,000,000 $2,400,000 $1,600,000 $6,400,000
ANS:
d $15,000,000 – ($10,000,000 – $1,400,000) = $6,400,000
Topic: Controlling investment LO 3 Trident Corporation acquires Uvell Company’s assets and liabilities for $40,000,000 in cash. At the date of acquisition, Uvell’s balance sheet reported assets of $90,000,000 and liabilities of $82,000,000. Investigation reveals that Uvell has unreported liabilities valued at $5,000,000. Trident reports how much goodwill on this acquisition? a. b. c. d.
$37,000,000 $43,000,000 $39,000,000 $49,000,000
ANS:
a $40,000,000 – ($90,000,000 - $82,000,000 - $5,000,000) = $37,000,000
Topic: Change to controlling interest LO 3 Viceroy Company owns 40% of the voting stock of Wagner Enterprises, and reports the investment using the equity method. The investment balance is currently $6,000,000, but its fair value is $9,000,000. Viceroy pays $18,000,000 in cash to acquire the remainder of Wagner’s stock. Wagner’s reported net assets have a book value of $7,000,000 and a fair value of $5,000,000, and it has unreported technology valued at $1,000,000. What is the effect of this transaction on Viceroy’s net income? a. b. c. d.
$ 2,000,000 gain $ 3,000,000 gain $17,000,000 loss No effect on income
ANS:
b $9,000,000 - $6,000,000 = $3,000,000 gain on equity method investment.
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-29
79.
80.
Topic: Change from controlling interest LO 3 Primer Enterprises owns all of the stock of Specialty Beverages, and includes Specialty’s assets and liabilities on its balance sheet. Primer sells 65% of Specialty stock to outside investors for $8,000,000, and retains 35% of the stock, currently valued at $4,200,000. Specialty’s net assets are currently carried on Primer’s balance sheet at $10,000,000. How is Primer’s income affected by this transaction? a. b. c. d.
$2,200,000 gain $1,200,000 gain $8,400,000 loss No effect on income
ANS:
a $8,000,000 + $4,200,000 - $10,000,000 = $2,200,000.
Topic: Variable interest entities LO 3 Lavalle Corporation creates a separate legal entity that acquires equipment and leases it to Lavalle. Lavalle does not own any of the entity’s stock. Which statement is false? a.
d.
Lavalle does not consolidate the entity because it doesn’t have any ownership interests in it. The entity is a variable interest entity if it cannot obtain financing on its own. Lavalle consolidates the entity if the entity is a variable interest entity and Lavalle absorbs the entity’s risks and rewards. Lavalle will not consolidate the entity if it is not a variable interest entity.
ANS:
a
b. c.
81.
Topic: Equity method investments, IFRS LO 4 Sanofi reports using IFRS and invests in some of the voting shares of Pasteur. What is the deciding factor on whether it uses the equity method for this investment, or treats it as an AFS security? a. b. c. d.
Does Sanofi intend to hold Pasteur’s stock for a term longer than one year? Does Sanofi own at least 20% of Pasteur’s stock? Does Sanofi significantly influence Pasteur’s decisions? Is Pasteur a U.S. company?
ANS:
c
©Cambridge Business Publishers, 2023 1-30
Advanced Accounting, 5th Edition
82.
Topic: Joint ventures, IFRS LO 4 At the beginning of the current year, Jalu S.A. enters a joint venture with another company to develop new technology. Each company invests €1,000,000 for a 50% interest in the joint venture. During the year, the joint venture reports income of €200,000 and pays dividends of €60,000. At the end of the year, the joint venture’s balance sheet reports €5,000,000 in assets and €2,600,000 in liabilities. Jalu reports €22,000,000 in assets and €8,000,000 in liabilities from its own operations. At what amount are Jalu’s total liabilities reported at the end of the year?
83.
84.
a. b. c. d.
€ 8,000,000 €10,600,000 € 9,300,000 € 2,600,000
ANS:
a Using the equity method, only Jalu’s liabilities are reported.
Topic: IFRS for joint ventures LO 4 IFRS requires joint ventures to be reported as: a. b. c. d.
Equity method investments Trading securities Variable interest entities Available-for-sale securities
ANS:
a
Topic: IFRS for intercorporate debt investments LO 4 Unless there is a “significant deterioration” in credit quality, an IFRS company measures credit losses on AFS and HTM investments as: a.
85.
b. c. d.
The difference between book value and the present value of the future expected cash flows. Credit losses expected over the next 12 months. The difference between market value and book value. The decline in value due to a specific loss event.
ANS:
b
Topic: IFRS for intercorporate investments LO 4 What is “value-in-use,” as used in reporting intercorporate investments, per IFRS? a. b. c. d.
Present value of the investment’s future expected cash flows Market value of the investment in an active market Present value of the investment’s future dividend payments Market value of the investment when acquired
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-31
ANS: 86.
a
Topic: U.S. GAAP and IFRS for significant influence investments LO 2, 4 Under current standards, when is an impairment loss reported on a significant influence investment in the stock of another company, following U.S. GAAP and IFRS? U.S. GAAP Carrying value exceeds fair value, and the decline is other than temporary.
IFRS Carrying value is greater than the higher of market value or value-in-use, and a loss event has occurred.
b. Book value is greater than the higher of market value or value-in-use, and the decline is other than temporary.
Carrying value exceeds fair value, and the decline is other than temporary.
c.
Carrying value is greater than the higher of market value or value-in-use, and a loss event has occurred.
a.
Not reported
d. Carrying value is greater than the higher of market value or value-in-use, and a loss event has occurred. ANS: 87.
88.
Not reported
a
Topic: IFRS for intercorporate equity investments with no significant influence LO 4 IFRS companies can choose from which of the following options for reporting their investments in equity securities with no significant influence, depending on investment objectives? a. b. c. d.
Equity method only FV-NI only FV-NI or FV-OCI FV-NI or equity method
ANS:
c
Topic: IFRS for intercorporate debt investments LO 4 IFRS companies can choose from which of the following options for reporting their investments in debt securities, depending on investment objectives? a. b. c. d.
FV-NI or FV-OCI Amortized cost only Amortized cost or FV-OCI FV-NI, FV-OCI, or amortized cost
ANS:
d
©Cambridge Business Publishers, 2023 1-32
Advanced Accounting, 5th Edition
89.
90.
91.
92.
Topic: IFRS for intercorporate investments with no significant influence LO 4 Realized gains and losses on which of the following investments never appear on the income statement of IFRS companies? a. b. c. d.
FV-NI securities and FV-OCI equity securities FV-NI securities Amortized cost debt securities FV-OCI equity securities
ANS:
d
Topic: IFRS for intercorporate investments with no significant influence LO 4 When an IFRS company sells an equity investment categorized as not held for trading, gains and losses can be a. b. c. d.
reclassified from AOCI to income. reported in income. reclassified from AOCI to retained earnings. not reported.
ANS:
c
Topic: IFRS for intercorporate investments LO 4 Following IFRS, significant influence investments are usually called: a. b. c. d.
Long-term equity method investments Investments in associates Noncurrent stock investments Investments in financial instruments
ANS:
b
Topic: IFRS for joint ventures LO 4 Which statement is true regarding U.S. GAAP and IFRS for joint ventures? a. b. c. d.
U.S. GAAP reports joint ventures using the equity method, and IFRS requires consolidation of joint ventures. Both U.S. GAAP and IFRS require the equity method for joint ventures. U.S. GAAP requires consolidation of joint ventures while IFRS requires the equity method. Both U.S. GAAP and IFRS require consolidation of joint ventures.
ANS:
b
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-33
93.
Topic: IFRS vs U.S. GAAP for investments in equity securities with no significant influence LO 1, 4 How do IFRS and U.S. GAAP differ concerning the reporting of equity investments with no significant influence? a. b. c. d. ANS:
There is no difference; both standards require the investments to be reported at FV-NI. IFRS requires equity investments to be reported using the equity method, while U.S. GAAP requires FV-OCI. IFRS allows investments to be reported at FV-NI or FV-OCI, while U.S. GAAP requires FVNI for all equity investments with no significant influence. U.S. GAAP allows investments to be reported at FV-NI or FV-OCI, while IFRS requires FVNI for all equity investments with no significant influence. c
©Cambridge Business Publishers, 2023 1-34
Advanced Accounting, 5th Edition
PROBLEMS 1.
Topic: Investment in equity securities with no significant influence LO 1 A company invests in stock of other companies. None of the company’s holdings are considered a significant interest. Its accounting year ends December 31. Its investment activity during 2023 and 2024 is as follows: • •
Purchased stock of Acme Company in 2023 for $200,000. Sold the investment later in 2023 for $215,000. Purchased stock of Beeber Company in 2023 for $300,000. The investment had a fair value of $280,000 at the end of 2023. It was sold for $285,000 in 2024.
Required Prepare the journal entries necessary to report the above events. For recorded gains and losses, indicate whether they are reported in OCI or in income. ANS: 2023 Investment in Acme
200,000 Cash
Cash
200,000 215,000
Investment in Acme Gain (income) Investment in Beeber
200,000 15,000 300,000
Cash Loss (income)
300,000 20,000
Investment in Beeber 2024 Cash
285,000 Investment in Beeber Gain (income)
Test Bank, Chapter 1
20,000
280,000 5,000
©Cambridge Business Publishers, 2023 1-35
2.
Topic: Investment in equity securities with no significant influence LO 1 A company invests in stock of other companies. None of the company’s holdings are considered a significant interest. Its accounting year ends December 31. Its investment activity during 2023, 2024 and 2025 is as follows: • • •
Purchased stock of Fizzy Corporation in 2023 for $100,000. The market value of the stock at the end of the year was $115,000. Sold the investment in 2024 for $116,000. Purchased stock of Bubbly Bottlers in 2023 for $100,000. The market value of the stock at the end of the year was $90,000. It was sold for $85,000 in 2024. Purchased stock of Java Juices Company in 2024 for $100,000. The market value of the stock at the end of the year was $102,000. It was sold for $99,000 in 2025.
Required a. At what total amount is the company’s investment in equity securities reported on its December 31, 2023 and 2024 balance sheets? b. What net gains and losses on equity investments are reported on the company’s income statements for 2023, 2024, and 2025? ANS: a. b.
3.
2023 balance sheet: $115,000 + $90,000 = $205,000 2024 balance sheet: $102,000 2023 income statement: $15,000 gain - $10,000 loss = $5,000 net gain 2024 income statement: $1,000 gain - $5,000 loss + $2,000 gain = $2,000 net loss 2025 income statement: $3,000 net loss
Topic: Investment in debt securities classified as AFS LO 1 In 2023 a company purchases debt securities for $100,000 and classifies them as available-forsale. At the end of the year their market value is $105,000. In 2024 the company sells the securities for $98,000. Required Prepare the journal entries to report the above information in 2023 and 2024. For recorded gains and losses, indicate whether they are reported in OCI or in income. ANS: 2023 Investment in AFS securities
100,000 Cash
Investment in AFS securities
5,000 Gain (OCI)
©Cambridge Business Publishers, 2023 1-36
100,000
5,000
Advanced Accounting, 5th Edition
2024 Cash Reclassification of gain (OCI) Loss (income)
98,000 5,000 2,000 Investment in AFS securities
4.
105,000
Topic: Investment in debt securities classified as AFS, impairment LO 1 In 2023 a company purchases debt securities for $100,000 and classifies them as available-forsale. At the end of the year their market value is $90,000, the decline in value is attributed to market-related factors, and the securities are not expected to be sold before the loss is recovered. In 2024 the company sells the securities for $104,000. Required Prepare the journal entries to report the above information in 2023 and 2024. For recorded gains and losses, indicate whether they are reported in OCI or in income. ANS: 2023 Investment in AFS securities
100,000 Cash
100,000
Loss (OCI)
10,000 Investment in AFS securities
10,000
2024 Cash
104,000 Gain (income) Reclassification of loss (OCI) Investment in AFS securities
5.
4,000 10,000 90,000
Topic: Impairment of AFS debt securities LO 1 An AFS debt security was purchased for $100,000 in a prior year. At the beginning of the current year, it has a fair value of $125,000. At the end of the current year, its fair value is $70,000. The decline in value is attributed to a decline in the credit rating of the investee, and is expected to be recovered before the security is sold. Required Prepare the journal entry to report the impairment loss for the current year. ANS: Loss (income) Reclassification of gain (OCI)
30,000 25,000 Investment in AFS securities Allowance for credit losses
Test Bank, Chapter 1
25,000 30,000
©Cambridge Business Publishers, 2023 1-37
6.
Topic: Impairment of AFS debt securities LO 1 An AFS debt security was purchased at par value, $100,000. At the end of the year, its fair value is $80,000. $6,000 of the decline in value is attributed to market conditions, and the remainder is attributed to a decline in the credit rating of the investee. Losses are expected to be recovered before the security is sold. Required Prepare the journal entry to report the impairment loss for the current year. For reported gains and losses, indicate whether they are reported in income or OCI. ANS: Loss (income) Loss (OCI)
14,000 6,000 Investment in AFS securities Allowance for credit losses
7.
6,000 14,000
Topic: Impairment reporting for AFS debt securities LO 1 A company buys debt securities at a par value of $300,000, and designates them as AFS securities. At the end of the year, the company still holds the securities but their fair value has declined to $250,000. Required For each circumstance below, indicated where the loss, if any, is reported, and how the investment is reported on the company’s year-end balance sheet. a. The company intends to sell the securities before the loss in value is recovered. b. The company does not intend to sell the securities before the loss in value is recovered, and (1) The loss is determined to be a credit loss. (2) The loss is attributed as follows: $10,000 to changes in market conditions, and $40,000 to credit loss. ANS: a. The $50,000 loss is a direct reduction in the investment balance, and is reported in income. The investment is reported at $250,000. b. (1) The $50,000 loss is reported in income, and in an allowance account, contra to the investment account. Investment…………………………………………….. $300,000 Allowance for credit losses……………………. (50,000) Investment, net…………………………………….. $250,000 (2) The credit-related loss of $40,000 is reported in income, and in an allowance account, contra to the investment account. The market-related loss of $10,000 is reported in OCI, as a direct reduction in the investment account. Investment…………………………………………….. $290,000 Allowance for credit losses……………………. (40,000) Investment, net…………………………………….. $250,000
©Cambridge Business Publishers, 2023 1-38
Advanced Accounting, 5th Edition
8.
Topic: Impairment reporting for AFS debt securities LO 1 A company holds an investment in debt securities, categorized as available-for-sale, and originally purchased for $360,000. At the beginning of the year, the investment has a carrying value of $350,000, with the decline in value appropriately reported in AOCI. At the end of the year, the company still holds the securities, but their fair value has declined to $300,000. Of the total impairment loss, $45,000 is attributed to a credit loss. Required a. Prepare the journal entry to record the impairment. For recorded gains and losses, indicate whether they are reported in income or in OCI. b. Show how the investment is reported on the company’s balance sheet at the end of the year. ANS: a. The total impairment loss is $360,000 - $300,000 = $60,000, of which $45,000 is creditrelated. Loss (income) Loss (OCI)
45,000 5,000 Investment in AFS securities Allowance for credit losses
b.
9.
Investment…………………………………………….. Allowance for credit losses……………………. Investment, net……………………………………..
5,000 45,000 $345,000 (45,000) $300,000
Topic: Trading and AFS debt investments; impairment LO 1 On November 1, 2024, a U.S. company invests in debt securities at a cost of $2,000,000. On December 31, 2024, the securities have a market value of $1,890,000. The securities are sold on February 1, 2025, for $2,005,000. Required a. Assume the company classifies the securities as trading securities. Prepare the journal entries on December 31, 2024 and February 1, 2025 to record the above information. b. Repeat Part a., but this time assume the securities are classified as available-for-sale, and the 2024 decline in value is due to changes in market interest rates. The loss is expected to be recovered before the securities are sold. ANS: a.
December 31, 2024 Loss (income)
110,000 Investment in trading securities
February 1, 2025 Cash
2,005,000 Investment in trading securities Gain (income)
Test Bank, Chapter 1
110,000
1,890,000 115,000
©Cambridge Business Publishers, 2023 1-39
b.
December 31, 2024 Loss (OCI)
110,000 Investment in AFS securities
110,000
February 1, 2025 Cash
2,005,000 Investment in AFS securities Reclassification of loss (OCI) Gain (income)
1,890,000 110,000 5,000
Use the following information to complete problems 10 and 11: Guavalite Corporation purchased the following bonds at par: Investment Donar Company bonds Etlak Corporation bonds Fren Company bonds
Date of Acquisition 4/20/23 8/1/23 9/2/23
Cost $45,000 25,000 20,000
Fair Value 12/31/23 $40,000 N/A 21,000
Date Sold 2/10/24 9/15/23 1/14/24
Selling Price $42,000 23,000 22,500
Ignore the reporting for interest payments. Guavalite’s accounting year ends December 31. 10.
Topic: Debt investments classified as trading investments LO 1 Guavalite classifies the securities as trading investments. Required Prepare the journal entries to record the events related to these intercorporate investments. For reported gains and losses, indicate whether they are reported on the income statement or in OCI. ANS: 4/20/23 Investment in trading securities
45,000 Cash
45,000
8/1/23 Investment in trading securities
25,000 Cash
25,000
9/2/23 Investment in trading securities
20,000 Cash
20,000
9/15/23 Cash Loss on securities (income)
23,000 2,000 Investment in trading securities
©Cambridge Business Publishers, 2023 1-40
25,000
Advanced Accounting, 5th Edition
12/31/23 Loss on securities (income)
4,000
Investment in trading securities $(4,000) = ($40,000 – $45,000) + ($21,000 – $20,000) 1/14/24 Cash
4,000
22,500 Investment in trading securities Gain on securities (income)
2/10/24 Cash
21,000 1,500
42,000 Investment in trading securities Gain on securities (income)
11.
40,000 2,000
Topic: Debt investments classified as AFS investments LO 1 Guavalite Corporation classifies the debt investments as available-for-sale securities. Declines in value are due to changes in market interest rates, and are expected to be recovered. Required Prepare the journal entries to record the events related to these intercorporate investments. ANS: 4/20/23 Investment in AFS securities
45,000 Cash
45,000
8/1/23 Investment in AFS securities
25,000 Cash
25,000
9/2/23 Investment in AFS securities
20,000 Cash
20,000
9/15/23 Cash Loss on securities (income)
23,000 2,000 Investment in AFS securities
12/31/23 Loss on securities (OCI)
4,000
Investment in AFS securities $(4,000) = ($40,000 – $45,000) + ($21,000 – $20,000)
Test Bank, Chapter 1
25,000
4,000
©Cambridge Business Publishers, 2023 1-41
1/14/24 Cash Reclassification of gain (OCI)
22,500 1,000 Investment in AFS securities Gain on securities (income)
2/10/24 Cash Loss on securities (income)
21,000 2,500
42,000 3,000 Investment in AFS securities Reclassification of loss (OCI)
12.
40,000 5,000
Topic: Trading and AFS investments; impairment LO 1 On January 1, 2024, a company holds an investment in corporate bonds, reported on its balance sheet at $850,000. The company originally purchased the investment at a par value of $835,000. In answering the questions below, for any reported gains and losses, indicate whether they are reported in income or in OCI. Required a. Assume the company classifies the securities as trading securities. In 2024, it sells the securities for $855,000. Prepare the journal entry to record the sale, assuming no entries have been made previously in 2024. b. Repeat Part a., but this time assume the securities are classified as available-for-sale. c. Assume the securities are classified as available-for-sale, and they were not sold in 2024. Their value at December 31, 2024 is $800,000, attributed to the investee’s decline in credit rating. The loss is expected to be recovered. Prepare the journal entry to record the impairment loss, assuming no other entries have been made previously in 2024. ANS: a. Cash
855,000 Investment in trading securities Gain on sale (income)
850,000 5,000
b. Cash Reclassification of gain (OCI)
855,000 15,000 Investment in AFS securities Gain on sale (income)
850,000 20,000
c. Impairment loss (income) Reclassification of gain (OCI)
35,000 15,000 Investment in AFS securities Allowance for credit losses
©Cambridge Business Publishers, 2023 1-42
Advanced Accounting, 5th Edition
15,000 35,000
13.
Topic: AFS debt investment impairment LO 1 On January 1, 2024, a company invests $175,000 par value in debt securities, and designates them as available-for-sale. Following is valuation information for these securities for December 31, 2024 and 2025. The company does not expect to sell the securities before recovery of losses at the end of either year.
Fair value Present value of future cash flows
December 31, 2024 $128,000 130,000
December 31, 2025 $131,000 134,000
Required Prepare the journal entry or entries necessary to report the change in fair value of the debt securities as of December 31, 2024 and December 31, 2025. Indicate whether reported gains or losses appear in income or OCI. ANS: December 31, 2024 Impairment loss (income) Loss on AFS securities (OCI)
45,000 2,000 Allowance for credit losses Investment in AFS securities
December 31, 2025 Allowance for credit losses Loss on AFS securities (OCI)
45,000 2,000
4,000 1,000 Credit losses on AFS securities (income) Investment in AFS securities
14.
Topic: HTM investment LO 1 Nature Pure Corporation purchased a 2-year bond at the beginning of 2024, at a price to yield 3%, classified as HTM. The bond has a face value of $1,000,000, coupon rate 4%, interest paid at the end of each year. The bond is not impaired at the end of 2024. Required At what value is the bond reported on Nature Pure’s balance sheet at the end of 2024? Round to the nearest dollar. ANS: Original cost: $40,000/(1.03) + $1,040,000/(1.03)2 = $1,019,135 2024 interest revenue = 3% x $1,019,135 = 2024 interest received = 4% x 1,000,000 = Reduction in investment
$30,574 40,000 $ 9,426
Investment balance, end of 2024: $1,019,135 – $9,426 = $1,009,709
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-43
4,000 1,000
15.
Topic: HTM investment LO 1 A company acquired a 4-year $1,000,000 face value corporate bond on January 1, 2023. The bond pays 3% annually on December 31, and matures December 31, 2026. Round all answers to the nearest dollar. Required a. Assume the investment yields 4%. How much did the company pay for the bond? b. Assume the company categorizes the bond as a held-to-maturity investment. Calculate interest revenue for 2025 (the third year). ANS: a. b.
16.
$30,000/1.04 + $30,000/(1.04)2 + $30,000/(1.04)3 + $1,030,000/(1.04)4 = $963,701 2023 interest revenue = 4% x $963,701 = $38,548; cash received = $30,000, so the investment increases by ($38,548 - $30,000) = $8,548. 2024 interest revenue = 4% x ($963,701 + $8,548) = $38,890; cash received = $30,000, so the investment increases by ($38,890 - $30,000) = $8,890. 2025 interest revenue = 4% x (963,701 + $8,548 + $8,890) = $39,246
Topic: Investments in AFS and HTM securities; impairment LO 1 A company has investments in corporate bonds, classified as AFS and HTM. Information on these investments for the current year is as follows: •
•
An AFS security with a coupon rate of 3% was purchased at a par value of $100,000 in a previous year. Interest is paid at the end of the year. The security has a $104,000 fair value at the beginning of the current year. At the end of the year its fair value is $75,000, and it is determined that the decline in value is due to expected credit losses, which are recoverable. A 2-year bond is purchased at the beginning of the current year, at a price to yield 3.5%, classified as HTM. The bond has a face value of $1,000,000, coupon rate 4%, interest paid at the end of each year. At the end of the year, the bond has a fair value of $500,000, and it is determined that the decline in value is a credit loss.
Required Prepare the journal entries to record the events of the current year. Indicate whether gains or losses are reported in income or OCI. Round to the nearest dollar if necessary. ANS: AFS security: Cash
3,000 Interest revenue
3,000
Loss on securities (income) Reclassification of gain (OCI)
25,000 4,000 Investment in AFS securities Allowance for credit losses
©Cambridge Business Publishers, 2023 1-44
Advanced Accounting, 5th Edition
4,000 25,000
HTM security: Investment in HTM securities
1,009,498
Cash $40,000/(1.035) + $1,040,000/(1.035)2 = $1,009,498
1,009,498
Cash
40,000 Interest revenue (income) Investment in HTM securities
Ending investment balance = $1,009,498 – $4,668 = Fair value Impairment loss
35,332 4,668
$1,004,830 (500,000) $ 504,830
Impairment loss (income)
504,830 Allowance for credit losses
17.
504,830
Topic: Equity method investments LO 2 At the beginning of the year, Cornwall Corporation acquired 40% of the voting stock of Kingston Company for $4,000,000 in cash, when Kingston’s total book value was $20,000,000. The basis difference was attributed to goodwill. During the year, Kingston reported net income of $700,000 and declared and paid cash dividends of $100,000. Kingston also reported an other comprehensive loss of $5,000. Kingston sells merchandise to Cornwall at a markup of 20% on cost; $360,000 remains in Cornwall’s ending inventory. Cornwall uses the equity method to report its investment in Kingston. Required a. Compute Cornwall’s equity in net income and equity in other comprehensive income of Kingston for the year, reported on Cornwall’s statement of comprehensive income. b. Make the journal entry or entries necessary to report the investment in Kingston on Cornwall’s books for the year. ANS: a.
Share of reported income Less unconfirmed profit in ending inventory Equity in net income
40% x $700,000 [$360,000–($360,000/1.2)] x 40%
$ 280,000 (24,000) $ 256,000
Equity in other comprehensive loss: $5,000 OCL x 40% = $2,000
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-45
b. Investment in Kingston
4,000,000 Cash
4,000,000
Investment in Kingston
256,000 Equity in NI of Kingston (income)
Equity in OCL of Kingston (OCI)
256,000
2,000 Investment in Kingston
2,000
Cash
40,000 Investment in Kingston
18.
40,000
Topic: Equity method investments LO 2 Larkland Company acquired 30% of the voting stock of Martin Corporation at the beginning of the year for $50 million, when Martin’s total book value was $140 million. The basis difference was attributed to goodwill. During the year, Martin Corporation reported net income of $6,000,000, other comprehensive income of $200,000, and declared and paid cash dividends of $2,500,000. Larkland uses the equity method to report its investment in Martin. Required a. What is the basis difference at the date of acquisition? b. Prepare Larkland’s journal entries for the year, related to its investment in Martin. c. Calculate the balance in Investment in Martin, appearing on Larkland’s ending balance sheet for the year. ANS: a. b.
$50 million – (30% x $140 million) = $8 million Investment in Martin
50,000,000 Cash
Investment in Martin Cash
1,110,000 750,000 Equity in NI of Martin (income) Equity in OCI of Martin (OCI)
c.
50,000,000
1,800,000 60,000
$50,000,000 + $1,110,000 = $51,110,000
©Cambridge Business Publishers, 2023 1-46
Advanced Accounting, 5th Edition
19.
Topic: Equity method investments LO 2 Delta Corporation acquired 25% of the voting stock of Davidson Company in 2023. There was no basis difference. It is now 2024. Davidson reported 2024 net income of $5,000,000, other comprehensive income of $100,000, and declared and paid cash dividends of $1,500,000. Delta’s ending inventory contains $1,020,000 purchased from Davidson, and its beginning inventory contains $750,000 purchased from Davidson. Davidson sells inventory to Delta at a markup of 20% on cost. Delta uses the equity method to account for its investment in Davidson. Required a. Calculate equity in net income of Davidson, reported on Delta’s 2024 income statement. b. Prepare Delta’s 2024 journal entry or entries related to its investment in Davidson. c. What is the net effect of the investment in Davidson on Delta’s 2024 net income and on Delta’s 2024 comprehensive income? ANS: a.
25% of net income Unconfirmed profit on upstream ending inventory Confirmed profit on upstream beginning inventory Equity in net income
25% x $5,000,000
$1,250,000
25% x [$1,020,000 – ($1,020,000/1.2)] 25% x [$750,000 – ($750,000/1.2)]
(42,500) 31,250 $1,238,750
b. Investment in Davidson Cash
888,750 375,000 Equity in OCI of Davidson OCI) Equity in NI of Davidson (income)
c. 20.
25,000 1,238,750
Effect on net income: +$1,238,750 Effect on comprehensive income: $1,238,750 + $25,000 = +$1,263,750
Topic: Equity method investments LO 2 Grant Company acquired 40% of the voting stock of Jake Corporation on January 1, 2020, for $50,000,000. The basis difference was attributed entirely to goodwill. During the 5-year period from January 1, 2020 through December 31, 2024, Jake reported total net income of $25,000,000 and declared and paid $10,000,000 in dividends. During 2025, Jake reported net income of $4,000,000 and declared and paid $1,000,000 in dividends. Required a. Calculate the balance in Investment in Jake, reported on Grant’s December 31, 2024 balance sheet. b. Calculate the balance in Investment in Jake, reported on Grant’s December 31, 2025 balance sheet.
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-47
ANS: a.
b.
21.
Investment, 1/1/20 Equity in net income, 2020-2024 Share of dividends, 2020-2024 Investment, 12/31/24
40% x $25,000,000 40% x $10,000,000
$50,000,000 10,000,000 (4,000,000) $56,000,000
Investment, 12/31/2024 Equity in net income, 2025 Share of dividends, 2025 Investment, 12/31/25
40% x $4,000,000 40% x $1,000,000
$56,000,000 1,600,000 (400,000) $57,200,000
Topic: Equity method investments LO 2 Solac Company acquires 30% of the voting stock of Talgo Corporation on January 1, 2022, for $15,000,000, which was 30% of Talgo’s book value. It is now December 31, 2024. Solac sells merchandise to Talgo at a markup of 25% on cost. Talgo sells merchandise to Solac at a markup of 20% on cost. Below are the inventory balances held by Solac, purchased from Talgo, and held by Talgo, purchased from Solac, at various dates.
December 31, 2022 December 31, 2023 December 31, 2024
Inventory Held by Solac, Purchased from Talgo $1,920,000 3,000,000 3,120,000
Inventory Held by Talgo, Purchased From Solac $ 750,000 1,000,000 1,025,000
Talgo reports total net income of $2,800,000 for 2022 through 2023, and $1,600,000 for 2024. Talgo declares and pays no dividends during this period. Required a. Calculate equity in net income of Talgo, reported on Solac’s 2024 income statement. b. Calculate the Investment in Talgo balance, reported on Solac’s December 31, 2024 balance sheet. ANS: a.
30% net income Unconfirmed profit on upstream ending inventory Unconfirmed profit on downstream ending inventory Confirmed profit on upstream beginning inventory Confirmed profit on downstream beginning inventory Equity in net income, 2024
©Cambridge Business Publishers, 2023 1-48
30% x $1,600,000
$480,000
30% x [$3,120,000 – ($3,120,000/1.2)]
(156,000)
30% x [$1,025,000 – ($1,025,000/1.25)]
(61,500)
30% x [$3,000,000 – ($3,000,000/1.2)]
150,000
30% x [$1,000,000 – ($1,000,000/1.25)]
60,000 $472,500
Advanced Accounting, 5th Edition
b.
Investment, 1/1/22 Share of net income, 2022 through 2023 Unconfirmed profit on upstream ending inventory, 12/31/23 Unconfirmed profit on downstream ending inventory, 12/31/23 Investment, 12/31/23 Equity in net income, 2024 Investment, 12/31/24
$15,000,000 840,000
30% x $2,800,000 30% x [$3,000,000 – ($3,000,000/1.2)]
(150,000)
30% x [$1,000,000 – ($1,000,000/1.25)]
(60,000) 15,630,000 472,500 $16,102,500
Note: Confirmed and unconfirmed profits on 2022 inventories cancel out over time and do not affect the 12/31/23 investment balance. 22.
Topic: Equity method investments LO 2 Konica Company acquires 40% of the voting stock of Lexmark Corporation on January 1, 2020, for $50,000,000, and reports it using the equity method. There was no basis difference. Lexmark reports total net income of $15,000,000 for the period 2020 - 2023, and $2,000,000 for 2024. Lexmark declared and paid no dividends during the period 2020 – 2024. Lexmark sells merchandise to Konica at a markup of 25% on cost. The inventory balances held by Konica, purchased from Lexmark, are as follows. Inventory Held by Konica; Purchased from Lexmark December 31, 2023 $1,250,000 December 31, 2024 1,500,000 Required a. Calculate equity in net income of Lexmark, reported on Konica’s 2024 income statement. b. Calculate investment in Lexmark, reported on Konica’s December 31, 2024 balance sheet. ANS: a.
b.
40% 2024 net income Unconfirmed profit on upstream ending inventory Confirmed profit on upstream beginning inventory Equity in net income, 2021 Investment, 1/1/20 Share of net income, 2020-2023 Unconfirmed profit on upstream ending inventory, 12/31/23 Investment, 12/31/23 Equity in net income, 2024 Investment, 12/31/24
Test Bank, Chapter 1
40% x $2,000,000
$ 800,000
40% x [$1,500,000 – ($1,500,000/1.25)]
(300,000)
40% x [$1,250,000 – ($1,250,000/1.25)]
250,000 $ 750,000
40% x $15,000,000 40% x ($1,250,000 - $1,250,000/1.25)
$50,000,000 6,000,000 (250,000) 55,750,000 750,000 $56,500,000
©Cambridge Business Publishers, 2023 1-49
23.
Topic: Equity method investments LO 2 On January 1, 2022, Acme Beverages purchases 40% of the stock of Health Juices for $1,500,000, when the total book value of Health Juices was $3,000,000. Acme reports its investment using the equity method. The basis difference is attributed to goodwill, and there are no intercompany transactions. Health Juices reports the following income and dividends for 2022 through 2024. Health Juices does not report OCI.
2022 2023 2024
Income (loss) $120,000 (20,000) 60,000
Dividends $10,000 -6,000
Required a. Calculate the basis difference that is attributed to goodwill. b. Calculate the investment balance, reported on Acme’s December 31, 2024 balance sheet. ANS: a. b.
$1,500,000 – (40% x $3,000,000) = $300,000 Investment cost + 40% reported income 2022-2024 - 40% dividends 2022-2024 Investment balance, 12/31/24
24.
40% x $160,000 40% x $16,000
$1,500,000 64,000 (6,400) $1,557,600
Topic: Equity method investments and investee losses LO 2 Delta Corporation has owned 45% of the voting stock of Egret Company for many years, originally purchased at book value and reported using the equity method. Egret has reported significant net losses in recent years, and at the beginning of 2023, the carrying value of the investment is $1,000,000. Egret reports a loss of $3,000,000 for 2023, and the loss is considered other than temporary. In 2024 Egret unexpectedly reports net income of $900,000. Required a. What amount should Delta report on its 2023 income statement as equity in net loss of Egret? b. What amount should Delta report on its 2024 income statement as equity in net income of Egret? ANS: a. b.
45% x $3,000,000 = $1,350,000, but because the loss is considered other than temporary, Delta reports a 2023 equity in net loss of $1,000,000, which brings the investment balance to zero. 45% x $900,000 = $405,000. However, Delta has to make up for the $350,000 loss it didn’t recognize last year. Therefore, equity in net income for 2024 is ($405,000 - $350,000) = $55,000.
©Cambridge Business Publishers, 2023 1-50
Advanced Accounting, 5th Edition
25.
Topic: Change to significant influence investment LO 2 Franklin Corporation owns 15% of the voting stock of Grantham Company and has been reporting it as an equity investment with no significant influence. At the beginning of the current year, the investment has a fair value of $50,000,000. Franklin originally purchased its 15% interest for $35,000,000. Franklin purchases an additional 10% interest in Grantham’s voting stock for $40,000,000 and determines that the equity method is now appropriate. Any basis difference is attributed to goodwill. Grantham reports net income of $3,000,000 for the current year, and declares and pays $500,000 in dividends. The year-end fair value of Franklin’s 25% interest is $100,000,000. Required At what amount does Franklin report the investment on its year-end balance sheet? ANS:
26.
$50,000,000 + $40,000,000 + [($3,000,000 - $500,000) x 25%] = $90,625,000
Topic: Change from significant influence investment LO 2 Natural Beverages invests in 20% of the stock of Nature Bottlers for $20 million in cash on January 1, 2021, and reports the investment using the equity method. On January 1, 2023, Natural Beverages determines that it no longer has a significant influence on Nature Bottlers’ decisions, and changes its reporting accordingly. The fair value of the investment at December 31, 2021, 2022, and 2023 is $21 million, $21.5 million, and $23 million, respectively. Nature Bottlers reports the following for 2021-2023:
Net income OCI (L)
2021 $1,000,000 40,000
2022 $1,200,000 (10,000)
2023 $1,300,000 35,000
Any basis difference is attributed to goodwill and there are no intercompany transactions. Nature Bottlers declares no dividends during 2021-2023. Required Prepare the journal entries Natural Beverages makes for this investment during 2021-2023. What is the investment balance at December 31, 2023? ANS:
January 1, 2021 Investment in Nature Bottlers
20,000,000 Cash
20,000,000
December 31, 2021 Investment in Nature Bottlers
208,000 Equity in NI (income) Equity in OCI (OCI)
December 31, 2022 Investment in Nature Bottlers Equity in OCL (OCI)
238,000 2,000 Equity in NI (income)
Test Bank, Chapter 1
200,000 8,000
240,000
©Cambridge Business Publishers, 2023 1-51
January 1, 2023 Reclassification of OCI (OCI)
6,000 Investment in Nature Bottlers
Investment in Nature Bottlers
6,000 1,060,000
Unrealized gain (income) $1,060,000 = $21,500,000 - $20,440,000. December 31, 2023 Investment in Nature Bottlers
1,060,000
1,500,000
Unrealized gain (income) $1,500,000 = $23,000,000 - $21,500,000.
1,500,000
The investment balance at December 31, 2023 is its fair value, $23 million. 27.
Topic: Joint ventures LO 2 On January 1, 2019, Coca-Cola and another company jointly acquired Argo Natural Juices. Each acquiring company paid $10 million to acquire 50% of Argo. At the date of acquisition, Argo’s book value was $6 million, consisting of $2 million in capital stock, $3.7 million in retained earnings, and 0.3 million in accumulated other comprehensive income. The basis difference was attributed entirely to goodwill. It is now December 31, 2024. Argo reported net income of $240,000, other comprehensive income of $10,000, and declared and paid cash dividends of $40,000 in 2024. Coca-Cola treats Argo as an equity method investment. Argo’s balance sheet at December 31, 2024, is as follows: Argo 500,000 30,500,000 $ 31,000,000
Current assets Plant & equipment, net Total assets
$
Liabilities Capital stock Retained earnings Accumulated other comprehensive loss Total liabilities & equity
$ 23,000,000 2,000,000 6,100,000 (100,000) $ 31,000,000
Required a. Prepare Coca-Cola’s 2024 entries related to its investment in Argo. b. Calculate the ending balance in Investment in Argo, appearing on Coca-Cola’s December 31, 2024 balance sheet. ANS: a. Cash Investment in Argo
20,000 105,000 Equity in NI of Argo (income) Equity in OCI of Argo (OCI)
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120,000 5,000
Advanced Accounting, 5th Edition
b.
28.
Investment cost Change in retained earnings ($6,100,000 – $3,700,000) x 50% Change in AOCI/L ($300,000 + $100,000) x 50% Investment balance, December 31, 2024
$10,000,000 1,200,000 (200,000) $11,000,000
Topic: Joint ventures LO 2 At the beginning of the current year, Edgecor Corporation and another company created a joint venture. Each company contributed $10 million and has a 50% interest in the joint venture. At the end of the year, the joint venture reports the following balance sheet: Current assets Land, buildings, and equipment, net Investments in securities Total assets
Joint Venture $ 18,000,000 200,000,000 2,000,000 $220,000,000
Liabilities Capital stock Retained earnings Accumulated other comprehensive income Total liabilities & equity
$197,400,000 20,000,000 2,500,000 100,000 $220,000,000
The joint venture declared and paid a total of $500,000 in dividends during the year. The estimated market value of a 50% ownership of the joint venture is $14,000,000 at the end of the year. Edgecor uses the equity method to account for its joint venture. Required a. What was the joint venture’s reported net income for the year? b. Prepare a schedule calculating Edgecor’s ending investment balance. c. Edgecor’s beginning and ending credit balances for accumulated other comprehensive income were $160,000 and $170,000, respectively. What was Edgecor’s other comprehensive income or loss from its own operations for the year? ANS: a. b.
c.
The joint venture’s ending retained earnings is $2,500,000 and it declared and paid dividends of $500,000. Therefore its net income was $3,000,000. Beginning investment balance Equity in NI (50% x $3,000,000) Equity in OCI (50% x $100,000) Share of dividends (50% x $500,000) Ending investment balance
$10,000,000 1,500,000 50,000 (250,000) $11,300,000
The change in Edgcor’s AOCI is a positive $10,000. Since equity in the OCI of the joint venture is $50,000, the other comprehensive loss from Edgecor’s operations is $40,000.
Test Bank, Chapter 1
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29.
Topic: Equity investments: no influence versus significant influence LO 1, 2 Spritz Company owns 15% of the stock of Turner Corporation. The investment was purchased for $200,000. At the beginning of the current year, the investment had a fair value of $230,000. At the end of the year, its fair value is $250,000. Turner reported net income of $100,000 for the year, and declared and paid cash dividends of $60,000. Spritz sells products to Turner at a markup of 20% on cost. Turner’s ending inventory for the year included a balance of $10,800 for products purchased from Spritz. Turner’s beginning inventory included no products purchased from Spritz. Required Prepare the journal entries Spritz makes during the year to record the above facts, assuming: a. b.
Spritz treats its investment as an equity investment with no significant influence. Spritz treats its investment as having significant influence and uses the equity method.
ANS: a. Investment in equity securities
20,000 Unrealized gain (income)
Cash
20,000 9,000
Dividend income (income) b.
9,000
Equity in net income calculation: 15% x {$100,000 – [($10,800 – ($10,800/1.2)]} = $14,730 Cash Investment in Turner
9,000 5,730 Equity in NI of Turner (income)
©Cambridge Business Publishers, 2023 1-54
14,730
Advanced Accounting, 5th Edition
30.
Topic: Merger LO 3 Delicious Delicacies acquires the assets and liabilities of Elegant Eateries for $10,000,000 cash. At that date, Elegant Eateries’ balance sheet is as follows: Assets Current assets Plant & equipment, net Total
$ 1,000,000 10,000,000 _ _______ $11,000,000
Liabilities and Equity Current liabilities Long-term debt Capital stock Total
$
900,000 8,000,000 2,100,000 $11,000,000
Elegant’s current assets are overvalued by $600,000, and its plant and equipment is overvalued by $6,000,000. Elegant has previously unreported brand names of $5,000,000. Required Prepare the journal entry made by Delicious Delicacies to record its acquisition of Elegant Eateries. ANS: Current assets Plant & equipment Brand names Goodwill
400,000 4,000,000 5,000,000 9,500,000 Current liabilities Long-term debt Cash
Test Bank, Chapter 1
900,000 8,000,000 10,000,000
©Cambridge Business Publishers, 2023 1-55
31.
Topic: Merger LO 3 Kent Industries acquires the assets and liabilities of Stow Inc. for $100,000,000 cash. Stow Inc. has the following assets and liabilities, at fair value: Cash Receivables Inventories Plant assets Notes payable
$
300,000 1,400,000 9,000,000 28,000,000 25,000,000
Required a. Calculate the goodwill Kent records for this acquisition. b. If Stow’s notes payable had a market value of $23,000,000, how is goodwill affected? Calculate the amount and direction of change. ANS: a.
b.
Price paid Fair value of identifiable net assets acquired: Cash Receivables Inventories Plant assets Notes payable Goodwill
$100,000,000 $
300,000 1,400,000 9,000,000 28,000,000 (25,000,000)
13,700,000 $86,300,000
If notes payable have a market value of $23,000,000, a decrease of $2,000,000, the fair value of identifiable net assets acquired increases to $15,700,000 (= $13,700,000 + $2,000,000) and goodwill declines to $84,300,000 (= $86,300,000 - $2,000,000).
©Cambridge Business Publishers, 2023 1-56
Advanced Accounting, 5th Edition
32.
Topic: Merger, stock acquisition LO 3 International Beverages acquires Ecoplastics Recycling Company for $100,000,000 in cash. Ecoplastics’ balance sheet reports the following assets and liabilities, at fair value: Cash & receivables Inventories Buildings & equipment Patents & trademarks Current liabilities Long-term debt
$
500,000 1,100,000 35,000,000 10,000,000 7,000,000 40,000,000
Ecoplastics also has developed technology, valued at $15,000,000, which does not appear on its balance sheet but is appropriately reported by International Beverages on acquisition. Required a. Prepare the journal entry International Beverages makes to record the acquisition of Ecoplastics, assuming this is a merger. b. Repeat Part a, assuming this is a stock acquisition. ANS: a. Cash & receivables Inventories Buildings & equipment Patents & trademarks Developed technology Goodwill
500,000 1,100,000 35,000,000 10,000,000 15,000,000 85,400,000 Current liabilities Long-term debt Cash
7,000,000 40,000,000 100,000,000
b. Investment in Ecoplastics
100,000,000 Cash
Test Bank, Chapter 1
100,000,000
©Cambridge Business Publishers, 2023 1-57
33.
Topic: Merger LO 3 Ferodo Industries acquires the assets and liabilities of Grundig Inc. for $85,000,000 cash. At that date, Grundig’s balance sheet is as follows: Assets Cash, receivables Merchandise inventory Land, buildings, and equipment, net
$
600,000 3,000,000
300,000,000
_________ $303,600,000
Total
Liabilities and equity Current liabilities Long-term bonds payable Common stock Additional paid-in capital Retained loss Accumulated other comprehensive loss
$ 6,000,000 300,000,000 300,000 60,000,000 (53,200,000) (9,500,000) $303,600,000
At the acquisition date, Grundig’s assets and liabilities have the following fair values: Fair value $ 600,000 2,500,000 100,000,000 6,000,000 300,000,000
Cash, receivables Merchandise inventory Land, buildings, and equipment Current liabilities Long-term bonds payable Grundig has $5,000,000 in unreported technology.
Required a. Prepare the journal entry made by Ferodo to record its acquisition of Grundig. b. Grundig’s book value is -$2,400,000. Explain why Ferodo paid $85,000,000, or $87,400,000 more than book value for Grundig. ANS: a. Cash, receivables Merchandise inventory Land, buildings, and equipment Technology Goodwill
600,000 2,500,000 100,000,000 5,000,000 282,900,000 Current liabilities Long-term bonds payable Cash
©Cambridge Business Publishers, 2023 1-58
6,000,000 300,000,000 85,000,000
Advanced Accounting, 5th Edition
b.
Grundig’s identifiable book values differ from fair value as follows: Merchandise inventory Land, buildings, and equipment Technology Total
Fair value – Book value $ (500,000) (200,000,000) 5,000,000 $(195,500,000)
This analysis indicates that Ferodo should pay $195,500,000 less than book value for Grundig, or -$197,900,000 (= -$2,400,000 - $195,500,000), based on Grundig’s identifiable net asset value. Ferodo was willing to pay $85,000,000 more than book value, indicating that Grundig has unidentifiable intangible assets, valued at $282,900,000 (= $85,000,000 + $195,500,000 + $2,400,000), which it records as goodwill. These assets could include reputation, work force, and other intangibles expected to create future revenues. On the other hand, Ferodo could have paid too much for Grundig, perhaps due to pressure from competing potential buyers or from Grundig’s existing shareholders.
Test Bank, Chapter 1
©Cambridge Business Publishers, 2023 1-59
34.
Topic: Merger LO 3 Parrott Corporation acquires all of the assets and liabilities of Swann Company. The fair values of Swann’s reported assets and liabilities are estimated to be as follows at the date of acquisition: Fair Value Dr (Cr) $ 400 1,500 (1,600)
Current assets Plant & equipment Liabilities
Parrott determines that Swann has not recorded the following intangible assets on its books. These intangible assets are appropriately reported by Parrott on acquisition. Fair Value $ 500 200
Completed technology Favorable leases
Required a. Assume Parrott pays $1,000 in cash to acquire all of Swann’s assets and liabilities. Prepare the journal entry Parrott makes to record the acquisition. b. Now assume Parrott pays $5,000 in cash to acquire all of Swann’s assets and liabilities. Prepare the journal entry Parrott makes to record the acquisition. ANS: a. Current assets Plant & equipment Completed technology Favorable leases
400 1,500 500 200 Liabilities Cash
1,600 1,000
b. Current assets Plant & equipment Completed technology Favorable leases Goodwill
400 1,500 500 200 4,000 Liabilities Cash
©Cambridge Business Publishers, 2023 1-60
1,600 5,000
Advanced Accounting, 5th Edition
35.
Topic: Merger LO 3 Tasty Drinks Company merges with Unkle Company, paying $2,000,000 for Unkle’s net assets. Unkle’s reported net assets total $2,100,000, but the fair value of Unkle’s noncurrent assets is $2,500,000 below book value, and it has unreported brand names valued at $100,000. Required How much goodwill does Tasty Drinks report? ANS: $2,000,000 – ($2,100,000 - $2,500,000 + $100,000) = $2,300,000.
36.
Topic: Change from significant influence to control LO 3 Xavier Company owns 45% of the voting stock of Yellig Corporation, and reports the investment using the equity method. The investment balance is currently $50,000,000, but its fair value is $80,000,000. Xavier pays $100,000,000 in cash to acquire the remainder of Yellig’s stock, and reports the transaction as a merger. The fair value of Yellig’s identifiable net assets is $160,000,000. Required Prepare the journal entries to record acquisition of the remaining 55% interest. ANS: Investment in Yellig
30,000,000 Gain (income)
30,000,000
Identifiable net assets Goodwill
160,000,000 20,000,000 Cash Investment in Yellig
37.
100,000,000 80,000,000
Topic: Change from control to significant influence LO 3 Bubbly Beverages owns all of the stock of Organic Muffins Inc. and includes Organic’s net assets on its reported balance sheet. Bubbly sells 70% of its investment in Organic to outside investors for $32,000,000 and changes its reported for the remaining investment to the equity method. The carrying value of Organic’s net assets is $40,000,000, and the fair value of the remaining investment is $9,500,000. Required Prepare the journal entry to record the deconsolidation on Bubbly’s books. ANS: Investment in Organic Cash
9,500,000 32,000,000 Net assets Gain (income)
Test Bank, Chapter 1
40,000,000 1,500,000 ©Cambridge Business Publishers, 2023 1-61
TEST BANK CHAPTER 2 Mergers and Acquisitions MULTIPLE CHOICE 1.
2.
Topic: Acquisition accounting LO 1 ASC Topic 805 provides standards for reporting business combinations. Which one of the following is most likely to be considered a business combination? a. b. c. d.
Formation of a joint venture by two or more existing companies. Formation of a new subsidiary. Purchase of a controlling interest in an international company. Merger of an existing subsidiary with a parent.
ANS:
c
Topic: Acquisition accounting LO 1 The requirements of ASC Topic 805 do not apply to: a. b. c.
3.
4.
d.
Acquisitions where control is obtained over one or more businesses Combinations of two or more companies already under common control Acquisitions where control is obtained by acquiring the voting stock of the acquired company Acquisitions of product lines and divisions
ANS:
b
Topic: Acquisition accounting LO 1 ASC Topic 805 only applies to an acquisition if: a. b. c. d.
You are buying all the assets and liabilities of another company. You are buying a business and obtaining control of that business. You are a public company buying the assets and liabilities of another public company. You are buying over 50% of the voting stock of another company.
ANS:
b
Topic: Acquisition accounting LO 1 Acquisition accounting only applies to the acquisition of a business. What are the three elements of a business, per ASC Topic 805? a. b. c. d.
assets, liabilities, and equity facilities, workforce, and contracts input, process, and output products, services, and workforce
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-1
ANS: 5.
6.
7.
8.
c
Topic: Acquisition accounting LO 1 Acquisition accounting only applies to the acquisition of a business. ASC Topic 805 identifies an initial condition that immediately determines that the transaction is not an acquisition of a business, without further analysis. What is this condition? a. b. c. d.
Acquisition of a division within another company. Acquisition of a single identifiable asset. Acquisition of only intangible assets. Acquisition of a single product line.
ANS:
b
Topic: Acquisition date LO 1 A company acquires another company by issuing its stock to the acquired company’s shareholders. The issued stock is valued at its fair value a. b. c. d.
On the date the merger agreement is signed. On the date the acquiring company gains control. On the date the stock is issued. At the beginning of the acquiring company’s next financial reporting period.
ANS:
b
Topic: Acquisition date LO 1 A company acquires the assets and liabilities of another company. The acquired company’s assets and liabilities are reported on the acquiring company’s books at fair value as of what date? a. b. c. d.
The day the acquiring company takes control of the acquired company The day the acquisition is announced to the public The day the acquiring company obtains the financing necessary for the acquisition The day the acquiring company completes its research concerning the value of the acquired assets and liabilities
ANS:
a
Topic: Identification of acquiring company LO 1 In acquisition accounting, one company is identified as the acquiring company. Which statement below is most likely to be true concerning the acquiring company. a. b. c. d.
It pays cash for the acquisition rather than issuing stock. Its shareholders sell their stock before the acquisition takes place. It is largest, in terms of assets, revenue, or profits. Its shareholders receive a premium over market value in the exchange of shares.
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Advanced Accounting, 5th Edition
ANS: 9.
Topic: Valuation of acquired assets and liabilities LO 1 Proctor Company acquires the assets and liabilities of Singer Corporation, in a transaction reported as a merger. How are the assets and liabilities of Proctor and Singer reported? a. b. c. d. ANS:
10.
Proctor’s assets and liabilities remain at book value, and Singer’s assets and liabilities are reported at fair value at the date of acquisition. Singer’s assets and liabilities remain at book value, and Proctor’s assets and liabilities are reported at fair value at the date of acquisition. The assets and liabilities of both Proctor and Singer are reported at fair value at the date of acquisition. Proctor’s assets and liabilities remain at book value, and Singer’s assets and liabilities are reported at fair value at the balance sheet date, each time a balance sheet is prepared. a
Topic: Valuation of acquired assets and liabilities LO 1 Proctor Company and Singer Corporation are acquired by a new legal entity, which absorbs the assets and liabilities of both companies. Singer is designated as the acquiring company. How are the assets and liabilities of Proctor and Singer reported? a. b. c. d. ANS:
11.
c
Proctor’s assets and liabilities remain at book value, and Singer’s assets and liabilities are reported at fair value at the date of acquisition. Singer’s assets and liabilities remain at book value, and Proctor’s assets and liabilities are reported at fair value at the date of acquisition. The assets and liabilities of both Proctor and Singer are reported at fair value at the date of acquisition. Singer’s assets and liabilities remain at book value, and Proctor’s assets and liabilities are reported at fair value at the balance sheet date, each time a balance sheet is prepared. b
Topic: Recognition of acquired assets LO 1 The following intangibles have been identified for an acquired company. Which one(s) are most likely to be separately capitalized by the acquiring company, per ASC Topic 805? • •
Franchise agreements Non-competition agreements
• •
Customer lists Potential contracts
a. b. c. d.
All four intangibles Franchise agreements, customer lists, and potential contracts Franchise agreements and potential contracts Franchise agreements, customer lists, and non-competition agreements
ANS:
d
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-3
12.
13.
14.
15.
Topic: Recognition of acquired assets, private companies LO 1 When a private company acquires another company, GAAP for private companies allows which identifiable intangible assets to be combined with goodwill and not separately capitalized? a. b. c. d.
Franchise agreements Order backlogs Databases Broadcast rights
ANS:
b
Topic: Valuation of acquired assets LO 1 Company A has unreported identifiable intangible assets that are very valuable, and would like investors to know about them. Which one of the following actions will allow these intangible assets to be reported? a. b. c. d.
Get a third-party appraisal of the intangible assets. Reclassify Company A’s reported plant and equipment as intangible assets. Find a company to combine with, and designate Company A as the acquirer. Find a company to combine with, and designate Company A as the company being acquired.
ANS:
d
Topic: Intangible assets acquired LO 1 Which of the following is least likely to be reported as an acquired identifiable intangible asset? a. b. c. d.
In-process research and development Synergies in developing future products Production processes Broadcast rights
ANS:
b
Topic: Valuation of intangible assets acquired LO 1 What is the most common way to value acquired intangible assets? a. b. c. d.
Income method Market approach Cost approach Opportunity cost approach
ANS:
a
© Cambridge Business Publishers, 2023 2-2
Advanced Accounting, 5th Edition
16.
Topic: Valuation of intangible assets acquired LO 1 Acquired developed technology is expected to generate after-tax operating income of $60,000 in the first year and grow at a rate of 8% over the next two years. Depreciation expense included in operating expenses is expected to be $6,000 in each of the next three years. The value of acquired developed technology is estimated as the present value of operating cash flow over the first three years. The appropriate discount rate is 20%, and cash flows are assumed to occur at year-end for purposes of valuing acquired developed technology. Which value is closest to the amount at which the acquired developed technology should be reported on the acquiring company’s balance sheet? a. b. c. d.
$155,000 $148,000 $141,000 $159,000
ANS:
b Operating profit Depreciation expense Operating cash flow
Year 1 $60,000 6,000 $66,000
Year 2 $64,800 6,000 $70,800
Year 3 $69,984 6,000 $75,984
$66,000/1.2 + $70,800/(1.2)2 + $75,984/(1.2)3 = $148,139 17.
Topic: Valuation of intangible assets acquired LO 1 An acquired company has previously unreported technology that meets the criteria for recognition as an identifiable intangible asset. Forecasted net cash inflow for the first year is $500,000, and it is expected to grow at a rate of 4% for the next two years. The appropriate discount rate is 10%. What amount is closest to the correct value for the intangible asset, recorded at the date of acquisition? Assume all cash flows occur at the end of the year. a. b. c. d.
$1,090,000 $1,202,000 $1,291,000 $1,305,000
ANS:
c $500,000/1.1 + $520,000/(1.1)2 + $540,800/(1.1)3 = $1,290,608
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-3
18.
Topic: Goodwill LO 1 Pringle Corporation acquires Snax Company at an acquisition cost of $45,000,000. Identifiable assets and liabilities of Snax are as follows: Book Value Fair Value Current assets $ 1,500,000 $ 800,000 Land, buildings, and equipment (net) 16,000,000 7,000,000 Brand names -08,000,000 Liabilities 12,000,000 11,500,000 Goodwill arising from this acquisition is:
19.
a. b. c. d.
$17,700,000 $39,500,000 $15,500,000 $40,700,000
ANS:
d $45,000,000 – ($800,000 + $7,000,000 + $8,000,000 – $11,500,000) = $40,700,000
Topic: Goodwill calculation LO 1 Prolean Corporation acquired Setlan Company for $10,000,000 in cash, paid to Setlan’s former owners. The carrying value of Setlan’s reported net assets totaled $2,000,000 at the date of acquisition. Setlan's reported asset and liability values equaled their fair values, except for the following:
Inventory Land Identifiable intangible assets
Fair Value $ 15,000 80,000 400,000
Book Value $40,000 20,000 0
The identifiable intangible assets meet ASC Topic 805 requirements for separate capitalization. Goodwill reported for this acquisition is: a. b. c. d.
$7,965,000 $7,515,000 $7,565,000 $9,505,000
ANS:
c Cost Fair value of IDNA: Book value Inventory revaluation Land revaluation Recognition of ID intangibles Goodwill
© Cambridge Business Publishers, 2023 2-4
$10,000,000 $2,000,000 (25,000) 60,000 400,000
2,435,000 $7,565,000
Advanced Accounting, 5th Edition
20.
Topic: Goodwill calculation, previous goodwill LO 1 Mark Company acquires Nap Industries for total consideration of $50 million, recorded as a business combination. Nap’s reported net assets have a fair value of $10 million, including reported goodwill of $3 million. Mark identifies the following previously unreported intangible assets attributable to Nap: • • •
Customer lists, fair value $2 million Developed technology, fair value $3.5 million Skilled workforce, fair value $4 million
The goodwill arising from this business combination is
21.
a. b. c. d.
$33.5 million $34.5 million $37.5 million $40 million
ANS:
c $50 – ($10 - $3 + $2 + $3.5) = $37.5 million
Topic: Valuation of assets acquired LO 1 Pyn Corporation acquires all of Sys Company at an acquisition cost of $100,000,000 in cash. Fair values of Sys’ assets and liabilities are as follows: Current assets Land, buildings & equipment Brand names Customer lists Skilled workforce Potentially profitable future projects Liabilities
Fair Value $ 1,000,000 8,000,000 3,000,000 4,000,000 15,000,000 10,000,000 8,000,000
Pyn records goodwill of: a. b. c. d.
$67,000,000 $77,000,000 $82,000,000 $92,000,000
ANS:
d The entry to record the combination is: Current assets Land, buildings & equipment Brand names Customer lists Goodwill Liabilities Cash
Test Bank, Chapter 2
1,000,000 8,000,000 3,000,000 4,000,000 92,000,000 8,000,000 100,000,000 © Cambridge Business Publishers, 2023 2-5
22.
Topic: Goodwill calculation LO 1 X Company acquires all of Y Company’s assets and liabilities for $15,000,000 in cash. The fair values of Y’s assets and liabilities approximate their book values, except Y has developed technology valued at $5,000,000 that is not reported on its balance sheet, and its buildings are overvalued by $7,000,000. Here is Y’s balance sheet just prior to the acquisition: Current assets Land, buildings, and equipment Total assets
Y Company $ 500,000 9,500,000 $10,000,000
Liabilities Common stock, $1 par Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income Total liabilities and equity
$ 6,000,000 100,000 2,915,000 1,000,000 (20,000) 5,000 $10,000,000
How much goodwill is recognized for this acquisition? a. b. c. d.
$15,000,000 $ 7,000,000 $13,000,000 $19,000,000
ANS: c Cost Fair value of IDNA acquired: Reported net assets ($10,000,000 - $6,000,000 – $7,000,000) Developed technology Goodwill 23.
$15,000,000 $(3,000,000) 5,000,000
2,000,000 $13,000,000
Topic: Goodwill calculation, negative fair value of identifiable net assets LO 1 Yale Company acquires all of Zip Company’s assets and liabilities for $20 million in cash. Zip’s reported net assets total $4 million, it has previously unreported identifiable intangible assets of $1 million, and its plant and equipment is overvalued by $6.5 million. How much goodwill is recognized for this acquisition? a. b. c. d.
$16 million $21.5 million $15 million $9.5 million
ANS:
b $20 – ($4 + $1 - $6.5) = $21.5 million
© Cambridge Business Publishers, 2023 2-6
Advanced Accounting, 5th Edition
24.
Topic: Net asset valuation, prior goodwill LO 1 Kelly Corporation acquires the assets and liabilities of Lawson Company. Below is the balance sheet of Lawson, along with fair values of its assets and liabilities, at the date of acquisition.
Current assets Plant & equipment Identifiable intangibles Goodwill Current liabilities Long-term liabilities Capital stock Retained earnings
Book value Dr (Cr) $ 1,000,000 60,000,000 10,000,000 4,000,000 (2,000,000) (52,000,000) (3,000,000) (18,000,000)
Fair value Dr (Cr) $ 500,000 30,000,000 35,000,000 10,000,000 (2,000,000) (52,000,000)
Kelly pays $50,000,000 in cash for the assets and liabilities of Lawson. How much goodwill does Kelly record for this acquisition?
25.
a. b. c. d.
$28,500,000 $34,500,000 $38,500,000 $0
ANS:
c $50,000,000 – ($500,000 + $30,000,000 + $35,000,000 – $2,000,000 – $52,000,000) = $38,500,000
Topic: Contingent Consideration LO 2 Peters Corporation acquires all of the voting shares of Stefan Company by issuing 500,000 shares of $1 par common stock valued at $10,000,000. Included in the agreement is a contingency guaranteeing the former shareholders of Stefan that Peters’ shares will be worth at least $18 per share after one year. If the shares are worth less, Peters will pay the former shareholders of Stefan enough cash to reimburse them for the decline in value below $18 per share. Peters estimates that there is a 5% chance that the stock value will be $16 at the end of one year, and a 95% chance that the stock value will be $18 per share or higher. A discount rate of 10% is appropriate. Which amount below is closest to the value of the contingent consideration at the date of acquisition? a. b. c. d.
$1,000,000 $ 45,000 $ 50,000 $ 865,000
ANS:
b [($18 – $16) x 500,000] x 0.05 = $50,000/1.10 = $45,455
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-7
26.
27.
Topic: Acquisition cost LO 2 Poppy Corporation acquires Stevens Company, paying the owners of Stevens 1,000,000 new shares with a par value of $0.50 per share and a fair value of $60 per share at the date of acquisition. Poppy also incurs cash registration fees of $50,000 and consulting fees of $500,000. Several of Stevens’ former owners will stay on as employees, and Poppy agrees to pay them an additional amount if they remain with the company. The present value of this agreement at the date of acquisition is $300,000. What is Poppy’s reported acquisition cost? a. b. c. d.
$60,000,000 $60,500,000 $60,300,000 $60,800,000
ANS:
a $60 x 1,000,000 = $60,000,000. Registration fees reduce APIC, consulting fees are expensed, and the contingent payment to employees is compensation for future services.
Topic: Acquisition cost and goodwill LO 1, 2 A company acquires the assets and liabilities of another company. The fair value of the acquired company’s identifiable net assets is $5,000,000. The acquisition transaction includes the following: • • • •
$5,000,000 in cash paid to the former owners of the acquired company 150,000 new shares of stock with a market value $45/share. Registration fees, paid in cash, were $1,000,000. $4,000,000 in cash paid to the underwriter for consulting services Earnings contingency with an expected present value of $3,000,000 at the date of acquisition
Goodwill for this acquisition is: a. b. c. d.
$11,750,000 $14,750,000 $10,750,000 $ 9,750,000
ANS:
d Acquisition cost = $5,000,000 + (150,000 x $45) + $3,000,000 = $14,750,000 Goodwill = $14,750,000 – $5,000,000 = $9,750,000
© Cambridge Business Publishers, 2023 2-8
Advanced Accounting, 5th Edition
28.
Topic: Acquisition-related costs LO 2 Prescott acquires all of the stock of Sanders by issuing new stock to the previous shareholders of Sanders. Prescott paid consulting, accounting, and legal fees, and registration fees for the new stock issued by Sanders. What effect will these two items have on acquisition cost? a. b. c. d. ANS:
29.
30.
Consulting Fees No effect Increase No effect Increase
Registration Fees Increase Increase No effect No effect
c Consulting, accounting, and legal fees are expensed as incurred, and registration fees reduce APIC. Neither adds to acquisition cost.
Topic: Acquisition cost, contingent payments LO 2 The expected present value of contingent payments made by an acquiring company to the former owners of the acquired company are part of the acquisition cost a. b. c. d.
At all times. When they are compensation for future employee services. When they are tied to a future company performance goal. Never.
ANS:
c
Topic: Acquisition cost, earnings contingency LO 2 An acquirer includes an earnings contingency in the acquisition agreement. Additional cash will be paid to the former owners of the acquired company if the acquired company’s performance exceeds certain thresholds within the next three years. The payoff, if any, would occur three years after the acquisition. Which of the following statements is false? a.
c. d.
The earnings contingency is not reported at the date of acquisition but is reported as an adjustment to the acquisition price if and when paid. The earnings contingency is reported as a liability on the acquiring company’s books at the date of acquisition. If the discount rate decreases, the earnout value increases. The earnings contingency usually increases reported goodwill at the date of acquisition.
ANS:
a
b.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-9
31.
32.
33.
Topic: Acquisition cost, earnings contingency LO 2 ABC Corporation acquires the assets and liabilities of XYZ Company in a merger. If ABC offers the former shareholders of XYZ an earnings contingency, what is the likely result of having this contingency, on ABC’s balance sheet at the date of acquisition? a. b. c. d.
ABC will report less goodwill. ABC will revalue XYZ’s previously reported assets at higher amounts. ABC will revalue XYZ’s previously reported liabilities at higher amounts. ABC will report a liability for the earnings contingency.
ANS:
d
Topic: Acquisition cost, registration fees LO 2 Parish Corporation issues new stock with $1/share par value to the former shareholders of Sanford Company, in a merger. The registration fees Parish pays to issue the new stock will a. b. c. d.
Increase goodwill. Reduce Parish’s income. Increase previously unreported identifiable intangible assets acquired. Reduce Parish’s additional paid-in capital.
ANS:
d
Topic: Acquisition costs and goodwill LO 1, 2 Which one of the following items increases the amount of goodwill recognized in an acquisition? a. b.
d.
Consulting fees paid to Goldman Sachs Payments offered to employees of the acquired company that are based on their future performance An earnout added to an acquisition agreement to motivate the acquired company’s shareholders to sell Registration fees the acquiring company pays to issue new stock in an acquisition
ANS:
c
c.
34.
Topic: Acquisition costs LO 2 All of the following increase the acquisition cost of the acquired company except: a. b. c. d.
Fair market value of stock issued by the acquiring company to the former shareholders of the acquired company Fair market value of debt issued by the acquiring company to acquire the voting stock of the acquired company Payments to the former owners of the acquired company that are contingent on continued employment in the firm Earnings contingency that is dependent on the future performance of the acquired company
© Cambridge Business Publishers, 2023 2-10
Advanced Accounting, 5th Edition
ANS: 35.
36.
Topic: Valuation of acquired net assets, acquisition costs LO 1, 2 ABC Corporation acquires the assets and liabilities of XYZ Company. Holding everything else constant, which situation will result in ABC reporting more goodwill on this acquisition? a. b. c. d.
XYZ has previously unreported identifiable intangible assets. The market rate of interest on XYZ’s liabilities has declined. The fair value of XYZ’s buildings and equipment is higher than its book value. ABC pays fees to outside consultants in connection with this acquisition.
ANS:
b
Topic: Acquired net assets, acquisition costs LO 1, 2 Which item affects the reported net income of an acquiring company at the date of acquisition? a.
d.
An earnout agreement promising future payments to the former owners of the acquired company, dependent on the acquired company’s future performance Fees paid to outside accountants and lawyers Identifiable intangible assets acquired, that were not previously reported by the acquired company Goodwill recognized as a result of the acquisition
ANS:
b
b. c.
37.
c
Topic: Acquisition cost, contingent consideration LO 2 An acquired company’s former owners become employees of the acquiring company. At the date of acquisition, an acquiring company promises to make future payments to these former owners, which are terminated when the former owners are no longer employed. At the date of acquisition, the acquiring company: a. b. c. d.
Does not report these contingent payments Reports the contingent payments as a liability, at expected present value Reports the contingent payments as a liability, by summing up the expected future payments Reports the contingent payments as a credit to equity
ANS:
a
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-11
38.
Topic: Acquisition costs, goodwill LO 1, 2 An acquiring company pays $50 million in cash, and issues new no-par stock with a fair value of $90 million, to the acquired company’s former owners, for the assets and liabilities of the acquired company. Registration fees associated with the new stock issuance are $500,000, paid in cash. Consulting fees for the acquisition are $700,000, paid in cash. The fair value of the acquired company’s identifiable net assets is $80 million. The entry or entries the acquiring company makes to record the acquisition have what net effect on its account balances? a. b. c. d.
Capital stock increases by $90 million. Expenses increase by 1.2 million. Cash decreases by $51 million. Goodwill increases by $60 million.
ANS:
d The acquisition entry is: Identifiable net assets Goodwill Merger expenses
80,000,000 60,000,000 700,000 Cash Capital stock
51,200,000 89,500,000
Use this information to answer questions 39 and 40. Pyn Corporation acquires all of Sys Company’s assets and liabilities, reported as a merger. Acquisition-related items are as follows: • • • • •
$60 million in cash paid to Sys’ former shareholders $25 million fair value of stock issued $1 million consulting fees, paid in cash $4 million in new stock registration fees, paid in cash Earnout with an expected present value of $3 million
Fair values of Sys’ assets and liabilities are as follows: Current assets Land, buildings, and equipment Brand names Customer lists Skilled workforce Potentially profitable future projects Liabilities
© Cambridge Business Publishers, 2023 2-12
Fair Value $ 1,000,000 5,000,000 2,000,000 4,000,000 15,000,000 10,000,000 6,000,000
Advanced Accounting, 5th Edition
39.
Topic: Valuation of assets and liabilities acquired, acquisition costs LO 1, 2 Pyn records goodwill of: a. b. c. d.
$83,000,000 $87,000,000 $82,000,000 $85,000,000
ANS:
c The entry made to record the acquisition is: Current assets Land, buildings, and equipment Brand names Customer lists Goodwill Merger expenses
1,000,000 5,000,000 2,000,000 4,000,000 82,000,000 1,000,000 Liabilities Cash Capital stock
40.
41.
9,000,000 65,000,000 21,000,000
Topic: Valuation of assets and liabilities acquired, acquisition costs LO 1, 2 What is the effect of Pyn’s acquisition entry on Pyn’s income? a. b. c. d.
No effect $1,000,000 reduction $4,000,000 reduction $3,000,000 reduction
ANS:
b Only consulting fees are expensed.
Topic: Acquisition cost LO 2 Kaylo Corporation acquires Lotty Inc., paying the following: $25 million in cash, new stock with a fair value of $70 million and par value of $1 million, stock registration fees of $2 million, and acquisition-related advisory and legal fees of $8 million. The total acquisition cost is a. b. c. d.
$95 million $94 million $97 million $105 million
ANS:
a $25 + $70 = $95 million
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-13
42.
43.
Topic: Acquisition cost LO 2 Menlo Corporation acquires Newton Inc., paying the following: new stock with a fair value of $50 million, stock registration fees of $3 million, an earnings contingency with a present value of $1 million, and converted stock options to Newton’s employees that had vested and were related to services performed prior to the acquisition, valued at $5 million. The total acquisition cost is a. b. c. d.
$50 million $55 million $56 million $59 million
ANS:
c $50 + $1 + $5 = $56 million
Topic: Changes in asset values subsequent to acquisition LO 3 Sheetz Company is purchased by Pulsar Corporation at the beginning of its accounting year, at an acquisition cost that is $25,000,000 greater than the fair value of identifiable net assets acquired. One of the assets acquired is a building, originally valued at $15,000,000 at the date of the purchase. Six months after the acquisition, it is discovered that the building was actually worth $7,000,000 at the date of acquisition. What entry is made to reflect this new information?
44.
a. b. c. d.
Dr. goodwill; Cr. building for $8,000,000 Dr. loss on building; Cr. building for $8,000,000 Dr. retained earnings; Cr. building for $8,000,000 no entry is made
ANS:
a
Topic: Changes in asset values subsequent to acquisition LO 3 Pearson Company acquired Sunview Company at an acquisition cost that was $20 million greater than the fair value of identifiable net assets acquired. Pearson assigned a fair value of $1,000,000 to Sunview’s land. Ten months later, Pearson obtained information that the land was worth $4,000,000 at the date of acquisition. How does Pearson account for this value change? a. b. c. d.
Gain of $3,000,000, reported in income Increase goodwill by $3,000,000 Loss of $3,000,000, reported in other comprehensive income Reduce goodwill by $3,000,000
ANS:
d
© Cambridge Business Publishers, 2023 2-14
Advanced Accounting, 5th Edition
45.
Topic: Changes in asset values subsequent to acquisition LO 3 An acquirer made the following entry to report an acquisition, occurring at the beginning of its accounting year: Tangible assets Intangible asset: technology Goodwill
50,000 6,000 9,000 Liabilities Cash
40,000 25,000
Six months after the acquisition, the technology is determined to be worthless. How is this information reported if (1) the new information relates to the value of the technology as of the date of acquisition, and (2) the new information relates to changes in its value since acquisition?
46.
a. b. c. d.
(1) $6,000 gain on acquisition in income (1) $6,000 loss in income (1) $6,000 increase in goodwill (1) $6,000 decrease in cash
ANS:
c
(2) $6,000 decrease in goodwill (2) $6,000 increase in goodwill (2) $6,000 loss in income (2) $6,000 loss in income
Topic: Subsequent changes in acquired asset values LO 3 Kelly Corporation acquires all of the assets and liabilities of Lawson Co. at the beginning of its accounting year, at an acquisition cost that is $50 million above the fair value of identifiable net assets acquired. Three months after the acquisition, land belonging to Lawson at the date of acquisition is discovered. The land has a fair value of $5,000,000. The entry to reflect this new information includes: a. b. c. d.
A credit to goodwill of $5,000,000 A credit to land of $5,000,000 A gain of $5,000,000, reported in income A loss of $5,000,000, reported in income
ANS:
a The correcting entry is: Land
5,000,000 Goodwill
Test Bank, Chapter 2
5,000,000
© Cambridge Business Publishers, 2023 2-15
47.
Topic: Subsequent changes in acquired asset values LO 3 Kelly Corporation acquires all of the assets and liabilities of Lawson Co. at the beginning of its accounting year, at an acquisition cost that is $50 million above the fair value of identifiable net assets acquired. Three months after the acquisition, it is determined that because of a downturn in the economy after the acquisition, acquired brand names with indefinite lives are worth $5,000,000 less than originally estimated. The entry to reflect this new information includes: a. b. c. d.
A credit to goodwill of $5,000,000 A debit to identifiable intangibles of $5,000,000 A gain of $5,000,000, reported in income A loss of $5,000,000, reported in income
ANS:
d The correcting entry is: Impairment loss (income)
5,000,000 Identifiable intangibles
48.
5,000,000
Topic: Subsequent changes in acquired asset values LO 3 Quality Inc. acquires Rekless Company for $100 million in cash at the beginning of its accounting year, and records the acquisition as a merger. At the date of acquisition, Rekless’ reported net assets have a fair value of $15 million and previously unreported intangible assets, appropriately recognized per ASC 805, have a fair value of $10 million for technology, and $10 million for favorable leases. Six months after the acquisition, it is determined that the technology has a value of $50 million, but the favorable leases are worthless. How are these value changes reported, if both represent a better estimate of the value of these intangibles at the date of acquisition? a.
d.
Identifiable intangibles increase $30 million and a gain of $30 million is reported in income. Identifiable intangibles increase, and goodwill decreases by $30 million. A loss of $10 million is reported in income and identifiable intangibles decrease by $10 million. Goodwill increases by $10 million and identifiable intangibles decrease by $10 million.
ANS:
b
b. c.
© Cambridge Business Publishers, 2023 2-16
Advanced Accounting, 5th Edition
49.
Topic: Subsequent changes in acquired asset values LO 3 Quality Inc. acquires Rekless Company for $100 million in cash at the beginning of its accounting year, and records the acquisition as a merger. At the date of acquisition, Rekless’ reported net assets have a fair value of $15 million and previously unreported intangible assets, appropriately recognized per ASC 805, have a fair value of $10 million for technology, and $10 million for favorable leases. Six months after the acquisition, it is determined that the technology has a value of $50 million, but the favorable leases are worthless. How are these value changes reported, if both represent changes in conditions occurring subsequent to the acquisition? a.
d.
Identifiable intangibles increase $30 million and a gain of $30 million is reported in income. Identifiable intangibles increase, and goodwill decreases by $30 million. A loss of $10 million is reported in income and identifiable intangibles decrease by $10 million. Goodwill increases by $10 million and identifiable intangibles decrease by $10 million.
ANS:
c
b. c.
50.
51.
Topic: Subsequent changes in acquisition valuations LO 3 The estimated value of assets acquired and liabilities assumed change subsequent to the acquisition. When should a company record the change as a correction of the initial acquisition entry? a. b. c. d.
The change takes place within one year of the acquisition. The change is normally reported in income. The change is normally reported as an adjustment to other comprehensive income. The change reflects value as of the date of acquisition, and occurs within one year.
ANS:
d
Topic: Subsequent value changes, bargain purchase LO 3, 4 Portland Company paid $21 million in cash for Seattle Company’s assets and liabilities on January 1, and reported the acquisition as a merger. The fair value of net assets acquired was $22 million, including previously unreported intangibles of $4 million. Three months later, the previously unreported intangibles are determined to have been worthless as of the date of acquisition. Portland’s accounting year ends December 31. What is the effect of this new information on Portland’s income for the year? a. b. c. d.
$1 million decrease $4 million decrease $1 million increase No effect
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-17
ANS:
a The correcting entry, within the measurement period, is: Bargain gain (income) Goodwill
1,000,000 3,000,000 Intangibles
52.
4,000,000
Topic: Subsequent value changes, bargain purchase LO 3, 4, 5 Portland Company paid $21 million in cash for Seattle Company’s assets and liabilities on January 1, and reported the acquisition as a merger. The fair value of net assets acquired was $22 million. Three months later, it is determined that Seattle’s acquisition-date liabilities failed to include a pending lawsuit, valued at $1 million, which should have been recorded per GAAP. Portland’s accounting year ends December 31. What is the effect of this new information on Portland’s income for the year? a. b. c. d.
$1 million decrease $2 million decrease $1 million increase No effect
ANS:
a The correcting entry, within the measurement period, is: Bargain gain (income)
1,000,000 Liabilities
53.
1,000,000
Topic: Subsequent value changes, bargain purchase LO 3, 4 Portland Company paid $21 million in cash for Seattle Company’s assets and liabilities on January 1, and reported the acquisition as a merger. The fair value of net assets acquired was $22 million, including previously unreported intangibles of $4 million. Three months later, the previously unreported intangibles are determined to be worthless because of changes in economic conditions subsequent to the acquisition. Portland’s accounting year ends December 31. What is the effect of this new information on Portland’s income? a. b. c. d.
$1 million decrease $4 million decrease $1 million increase No effect
ANS:
b The entry to record the write-down is: Loss (income)
4,000,000 Intangibles
© Cambridge Business Publishers, 2023 2-18
4,000,000
Advanced Accounting, 5th Edition
54.
Topic: Subsequent value changes, earnings contingency LO 2, 3 Pecan acquires Southern in an acquisition reported as a merger. The acquisition results in $50 million in goodwill. The acquisition cost includes an earnings contingency, valued at $1 million at the date of acquisition. Within the measurement period, additional information on Southern’s expected future performance at the date of acquisition reveals that the earnout actually had a fair value of $200,000 at the date of acquisition. The entry to record the new information includes a credit of $800,000 to: a. b. c. d.
Intangible assets Goodwill Gain on acquisition Earnings contingency liability
ANS:
b The entry to correct the date of acquisition value of the earnout is: Earnings contingency liability
800,000 Goodwill
55.
800,000
Topic: Earnings contingency, subsequent value changes LO 2, 3 Pecan acquires Southern in an acquisition reported as a merger. The acquisition results in $50 million in goodwill. The acquisition cost includes an earnings contingency, valued at $1 million at the date of acquisition. Within the next year, increases in the demand for Southern’s products subsequent to acquisition require that the earnout be revalued to $1,800,000. The entry to record the new information includes a debit of $800,000 to: a. b. c. d.
Intangible assets Goodwill Loss on contingency Earnings contingency liability
ANS:
c The change in earnout value is due to subsequent events and is therefore not a correction of the initial acquisition entry. The entry to record the revaluation is: Loss on contingency (income)
800,000 Earnings contingency liability
Test Bank, Chapter 2
800,000
© Cambridge Business Publishers, 2023 2-19
56.
57.
Topic: Subsequent value changes LO 3 ABC Corporation acquires all of the assets and liabilities of XYZ Company, at a price that is significantly higher than the fair value of the identifiable net assets acquired. Four months after the acquisition, a fire destroys some of XYZ’s property. How does ABC report this? a. b. c. d.
ABC will report less goodwill from the acquisition. ABC will report more goodwill from the acquisition. ABC will not report this event. ABC will report a loss on property in income.
ANS:
d The value change is due to subsequent events, so the decline in property value is an impairment loss.
Topic: Subsequent value changes LO 3 Pacific Company acquired Starz Company for $100 million and recognized $70 million in goodwill. Within a year after the acquisition, due to improvement in the economy, Starz’ land is worth $15 million more than the amount estimated at the date of acquisition. How is this information reported?
58.
a. b. c. d.
Gain on acquisition of $15 million Gain on land of $15 million Reduction in goodwill of $15 million Not reported
ANS:
d The value change is due to subsequent events and is therefore reported using normal accounting. Increases in the value of land are not reported.
Topic: Subsequent value changes LO 3, 5 Pacific Company acquired Starz Company for $100 million and recognized $70 million in goodwill. When it recorded the acquisition, Pacific recognized an additional liability not already reported on Starz’ balance sheet, for a pending lawsuit against Starz, and estimated its value at $12 million. Three months after the date of acquisition, Pacific determined that the present value of the lawsuit liability was really $2 million, because of events occurring subsequent to the date of acquisition. How is this information reported? a. b. c. d.
Loss on acquisition of $10 million Gain on lawsuit of $10 million Reduction in goodwill of $10 million Not reported
ANS:
b This is a subsequent event so normal accounting applies. Changes in the value of contingent liabilities affect income.
© Cambridge Business Publishers, 2023 2-20
Advanced Accounting, 5th Edition
59.
60.
Topic: Subsequent value changes LO 3 Atold Corporation reports goodwill of $40 million on acquisition of Benholm Company. Subsequently, Atold learns that one of Benholm’s buildings has increased in value by $4 million. How is this reported, if the information is discovered (1) within the measurement period, and (2) after the measurement period is over? a. b. c. d.
(1) Within the measurement period Decrease in goodwill Increase in goodwill Decrease in goodwill Increase in goodwill
ANS:
c
Topic: Subsequent value changes LO 3 Atold Corporation reports goodwill of $40 million on acquisition of Benholm Company. One month later, Atold learns that Benholm’s portfolio of AFS debt investments is worth $3 million more than estimated at the date of acquisition. How is this reported, if the information is (1) a better estimate of the portfolio’s value at the date of acquisition (within the measurement period), or (2) is due to events occurring subsequent to the acquisition (after the measurement period). a. b. c. d. ANS:
61.
(2) After the measurement period Gain on income statement Not reported Not reported Gain on income statement
(1) Within the measurement period Decrease in goodwill Decrease in goodwill Gain in OCI Not reported
(2) After the measurement period Gain in OCI Not reported Not reported Gain in OCI
a Within the measurement period, the correction of the original acquisition entry increases investments and reduces goodwill. After the measurement period, changes in the value of AFS debt investments are reported normally, in OCI.
Topic: Bargain purchase LO 4 Igloo Inc. acquires Jagged Enterprises for $15 million in an acquisition reported as a merger. Jagged’s recorded identifiable assets have a book value of $10 million and a fair value of $2 million. Jagged’s liabilities have a book and fair value of $5 million. Jagged has previously unrecorded identifiable assets of $20 million. The entry to record this acquisition incudes a bargain gain of a. b. c. d.
$ 5 million $ 2 million $18 million $0
ANS:
b $2 - $5 + $20 - $15 = $2 million
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-21
62.
Topic: Bargain purchase LO 4 Pluto Corporation purchased Saturn Corporation’s assets and liabilities for $4,500,000 in cash. Saturn's reported assets and liabilities have the following fair values at the date of acquisition:
Cash, receivables Inventory Land and buildings Liabilities
Fair Value Dr (Cr) $ 2,000,000 8,000,000 36,500,000 (40,000,000)
The gain on acquisition is: a. b. c. d.
$3,000,000 $2,500,000 $2,000,000 $0
ANS:
c Cost Fair value of identifiable net assets: Cash, receivables Inventory Land and buildings Liabilities Gain
63.
$4,500,000 $ 2,000,000 8,000,000 36,500,000 (40,000,000)
6,500,000 $ (2,000,000)
Topic: Bargain purchase LO 4 Titan Company pays $3,000,000 in cash to acquire Victory Company’s assets and liabilities. Book and fair values of Victory’s assets and liabilities appear below.
Current assets HTM debt investments Buildings, net Equipment, net Identifiable intangible assets Liabilities
Book Value $ 300,000 100,000 1,200,000 2,000,000 0 120,000
Fair Value $ 100,000 140,000 1,260,000 800,000 1,000,000 100,000
What is the gain on acquisition? a. b. c. d.
$1,200,000 $ 100,000 $ 200,000 $0
© Cambridge Business Publishers, 2023 2-22
Advanced Accounting, 5th Edition
ANS:
c Cost Fair value of net assets acquired: Current assets HTM debt investments Buildings Equipment Identifiable intangible assets Liabilities Gain on acquisition
64.
65.
$ 100,000 140,000 1,260,000 800,000 1,000,000 (100,000)
3,200,000 $ (200,000)
Topic: Bargain purchase LO 4 Packard Company acquires the assets and liabilities of Sutton Company, with an acquisition cost that is less than the fair value of its identifiable net assets. The difference between acquisition cost and the fair value of identifiable net assets acquired a. b. c. d.
Increases net income on the income statement Increases other comprehensive income on the statement of comprehensive income Reduces noncurrent assets acquired Reduces goodwill
ANS:
a
Topic: Bargain purchase, contingent consideration LO 2, 4 A company acquires the assets and liabilities of another company, paying the former owners cash plus an earnings contingency. A gain on acquisition is reported in income if: a. b.
d.
The cash paid is less than the book value of the net assets acquired. The cash paid plus the present value of the earnings contingency is less than the fair value of the identifiable net assets acquired. The cash paid plus the present value of the earnings contingency is less than the fair value of the tangible net assets acquired. The cash paid is less than the fair value of identifiable net assets acquired.
ANS:
b
c.
66.
$3,000,000
Topic: Bargain purchase LO 4 An acquiring company may be motivated to report a larger bargain gain to improve its bottom line. Which manipulation could be used to overstate the gain? a. b. c. d.
Overstate the present value of an earnings contingency. Overstate the fair value of acquired liabilities. Overstate the value of previously unreported intangible assets acquired. Overstate the value of acquired contingent liabilities such as pending lawsuits.
ANS:
c
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-23
67.
Topic: Bargain purchase LO 2, 4 Which of the following actions reduces the likelihood of reporting a bargain gain on an acquisition? a. b. c. d. ANS:
68.
b Only actions that increase total acquisition cost reduce bargain gains.
Topic: Bargain purchase LO 1, 3, 4, 5 Which of the following actions increases the likelihood of reporting a bargain gain on an acquisition? a. b. c. d. ANS:
69.
Pick a higher discount rate to value the earnings contingency. If stock is issued, pick an acquisition date when the market value of the stock is higher. Make cash payments to former owners conditional on continued employment in the company. If stock is issued, classify fewer cash outlays as registration fees.
Identify additional previously unreported acquired identifiable intangible assets. Use a higher discount rate to measure the present value of expected cash flows from previously unreported acquired favorable leases. Identify additional previously unreported acquired contingent liabilities. Identify increases in acquired plant asset value as outside the measurement period. a Only actions that increase the fair value of acquired identifiable net assets increase bargain gains.
Topic: Acquired in-process research and development LO 5 Average Company acquired all of the assets and liabilities of Best Company. Best Company has research and development projects in process, which have not yet been completed. How does Average Company report Best’s in-process research and development? a. b. c. d.
As a limited life intangible asset, at fair value As an indefinite life intangible asset, at fair value As part of goodwill It is not reported
ANS:
b
© Cambridge Business Publishers, 2023 2-24
Advanced Accounting, 5th Edition
70.
71.
72.
Topic: Acquired in-process research and development LO 5 Plaza Corporation acquires all of the assets and liabilities of Spiceland Company. How are Spiceland’s research and development costs of ongoing projects reported on Plaza’s books at the date of acquisition? a. b. c. d.
Included as part of goodwill Identifiable asset, at fair value Operating expense, at fair value Loss on acquisition, at Spiceland’s cost
ANS:
b
Topic: Acquired in-process research and development LO 5 If an acquired company has in-process R&D projects, the value of the R&D is reported as an acquired intangible asset: a. b. c. d.
Only if it already appears on the acquired company’s balance sheet Only if it has an alternative future use If the probability of success is greater than 50% At fair value
ANS:
d
Topic: Acquired in-process research and development LO 5 Tangle Corporation acquires all of the net assets of Unger Company, in an acquisition reported as a merger. The acquisition cost is $100 million, and Unger’s reported net assets have a book value of $35 million and a fair value of $30 million. Unger has previously unreported in-process research and development projects, which do not have an alternative use, valued at $10 million. It is uncertain whether these projects will result in future positive cash flow for the company. Goodwill reported on this acquisition is a. b. c. d.
$60 million $70 million $55 million $40 million
ANS:
a $100 - $30 - $10 = $60 million
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-25
73.
74.
75.
Preacquisition contingency LO 5 An acquirer discovers that a competitor has filed a patent infringement lawsuit against the company it is acquiring. This lawsuit is not currently recognized on the acquiree’s books. How should the acquirer report the lawsuit at the date it makes the acquisition? a. b. c. d.
Don’t report it until it is settled. Report it as a liability if it is a probable liability and its value can be reasonably estimated. Report it as a liability if it is a contractual or separable obligation. Report it as a liability if it is more likely than not that they will lose the lawsuit.
ANS:
b
Preacquisition contingency LO 5 An acquirer pays cash for the assets and liabilities of another company. Which of the following is most likely to be reported by the acquirer as one of the liabilities acquired from the other company? a. b. c. d.
Contingent consideration (earnout) included as part of the acquisition Warranty liability not previously reported by the acquiree Unreported unsettled lawsuit against the acquiree Promised payments to former owners of the acquiree, not related to future employment
ANS:
b
Topic: Preacquisition contingency LO 5 Brucker Company has warranty liabilities related to the products it has sold in the past, but does not report them on its books. Acme Corporation acquires all of Brucker’s net assets, and records the acquisition as a merger. In the journal entry to record the acquisition, Brucker’s warranty liabilities typically a. b. c. d.
decrease the amount of goodwill reported for the acquisition. increase the amount of goodwill reported for the acquisition. are reported at book value. are not reported.
ANS:
b
© Cambridge Business Publishers, 2023 2-26
Advanced Accounting, 5th Edition
76.
Topic: Acquired deferred taxes LO 5 In a nontaxable acquisition, assets acquired were reported on the acquired company’s books at $1,000, but they are reported on the acquiring company’s books at a fair value of $6,000. The acquiring company’s tax rate is 25% and the assets have a 5-year life. At the date of acquisition, the acquiring company reports an acquired deferred tax liability of:
77.
78.
a. b. c. d.
$6,000 $ 250 $1,250 $1,500
ANS:
c ($6,000 – $1,000) x 25% = $1,250
Topic: Acquired deferred taxes LO 5 An acquirer reports a deferred tax asset as one of the assets acquired in a business combination when: a. b. c. d.
The acquisition is taxable. The book value of acquired assets is greater than fair value. The book value of acquired assets is less than fair value. The acquiree’s tax rate is lower than the acquirer’s tax rate.
ANS:
b
Topic: Acquired deferred taxes LO 5 Potash Company acquires Spokane Corporation’s assets and liabilities, in a nontaxable acquisition. The tax basis of Spokane’s buildings is $50 million, with an average remaining life of 20 years, straight-line. The fair value of the buildings at the date of acquisition is $40 million. Assume the tax rate is 20%. Based on this information, because of the difference between reporting Spokane’s buildings on the books versus tax return, each year for the next 25 years Potash will: a. b. c. d.
Credit deferred tax asset $2,000,000 Credit deferred tax asset $100,000 Debit deferred tax liability $2,000,000 Debit deferred tax liability $100,000
ANS:
b The total deferred tax asset acquired = ($50 million – $40 million) x 20% = $2 million. Each year the deferred tax asset declines by $2 million/20 = $100,000.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-27
79.
Topic: Acquired deferred taxes LO 5 Peer Company acquires Spear Corporation’s assets and liabilities, in a nontaxable acquisition. The tax basis of Spear’s identifiable intangible assets is $1 million, with an average remaining life of 5 years, straight-line. The fair value of the identifiable intangible assets at the date of acquisition is $26 million. Assume the tax rate is 25%. Based on this information, because of the difference between reporting Spear’s plant assets on the books versus tax return, each year for the next 5 years Peer will:
80.
a. b. c. d.
Credit deferred tax liabilities $6.25 million Debit deferred tax liabilities $1.25 million Debit deferred tax assets $1.25 million Credit deferred tax assets $6.25 million
ANS:
b The total deferred tax liability acquired = ($26 million – $1 million) x 25% = $6.25 million. Each year the deferred tax liability declines by $6.25 million/5 = $1.25 million.
Topic: Acquired deferred taxes LO 5 An acquired company’s tax basis of identifiable net assets acquired is lower than the fair value of identifiable net assets acquired. The acquisition is nontaxable. Which statement below is true? a. b. c. d. ANS:
81.
The acquiring company reports an acquired deferred tax asset. In future years, because of the difference in tax basis and fair value of acquired identifiable net assets, reported tax expense will be less than taxes paid. No deferred tax assets or liabilities are acquired. In future years, taxable income will be lower than earnings before tax reported on the books. b
Topic: Acquired deferred taxes LO 5 Cognitive Company acquires the assets and liabilities of Tableau in a nontaxable acquisition. The carrying value of Tableau’s equipment is greater than its fair value. This tax situation will have what effect on Cognitive’s acquisition entry? a. b. c. d.
Goodwill is lower. Goodwill is higher. Acquired equipment is recorded at a lower amount. There is no effect on the acquisition entry.
ANS:
a A deferred tax asset is recorded so the fair value of identifiable net assets acquired is higher and goodwill is lower.
© Cambridge Business Publishers, 2023 2-28
Advanced Accounting, 5th Edition
82.
83.
84.
Topic: Acquired deferred taxes LO 5 Century Company acquires the assets and liabilities of Horizon Company in a nontaxable acquisition. The acquisition results in recognition of a deferred tax liability. Which of the following is a possible explanation for this deferred tax liability? a. b. c. d.
The acquisition was a bargain purchase. Horizon had previously unreported liabilities. The book value of Horizon’s buildings was less than their market value. The acquisition’s cost equaled Horizon’s book value.
ANS:
c
Topic: Acquired deferred taxes LO 5 ABC Company acquires DEF Inc. in a nontaxable business combination. DEF’s identifiable intangible assets have a fair value of $6,000,000 but are currently not reported on DEF’s books. The intangibles have a 4-year life, straight-line. The appropriate tax rate is 25%. The acquisition entry includes a. b. c. d.
a debit to deferred tax asset of $1,500,000. a credit to deferred tax liability of $1,500,000. a debit to deferred tax asset of $375,000. a credit to deferred tax liability of $375,000.
ANS:
b This is a deferred tax liability since the future amortization deducted for tax purposes is less than the expense reported in the financial statements. ($6,000,000 - $0) x 25% = $1,500,000.
Topic: Valuation of assets acquired and liabilities assumed, IPR&D, preacquisition contingencies LO 1, 5 Pawan Corporation acquires all of Sesa Company at an acquisition cost of $75,000,000 in cash. Sesa’s reported assets and liabilities have fair values as follows:
Current assets Land, buildings, and equipment (net) Liabilities
Fair Value $ 7,000,000 40,000,000 35,000,000
Pawan determines that Sesa has the following identifiable intangible assets, not reported on its balance sheet:
Developed technology In-process research & development Trade name
Fair Value $ 5,000,000 2,000,000 6,000,000
Pawan also discovers that Sesa has not properly recorded the expected liability from a settled lawsuit, currently estimated at $4,000,000. Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-29
Pawan records goodwill of:
85.
86.
a. b. c. d.
$58,000,000 $67,000,000 $56,000,000 $54,000,000
ANS:
d $75 – ($7 + $40 - $35 + $13 - $4) = $54 million
Topic: Preacquisition contingency, change in estimate LO 3, 5 Relic Corporation acquires the assets and liabilities of Vware Company and reports goodwill of $40 million. At the time of the acquisition, Vware was a defendant in a customer’s lawsuit, but it was expected that Vware would win, so the lawsuit was not recorded. Within a year of the acquisition, the lawyers persuade both parties to settle out of court for $8,000,000. How is this payment most likely to be reported? Credit cash, and debit: a. b. c. d.
Retained earnings (balance sheet) Other comprehensive income (statement of comprehensive income) Loss (income statement) Lawsuit liability (balance sheet)
ANS:
c
Topic: Step acquisition LO 5 Pivot Corporation owns 80% of the voting stock of Speegee Company. It then acquires the remaining 20% of Speegee’s voting stock. Which statement is true concerning reporting for the acquisition of the remaining 20%? a. The assets and liabilities of Speegee are revalued to fair value. b. If the acquisition cost is greater than the fair value of identifiable assets acquired, goodwill is recognized. c. If the carrying value of the purchased noncontrolling interest is greater than its acquisition cost, shareholders’ equity increases. d. If the carrying value of the purchased noncontrolling interest is greater than its acquisition cost, equity declines. ANS:
c
© Cambridge Business Publishers, 2023 2-30
Advanced Accounting, 5th Edition
87.
Topic: Step acquisition LO 5 Asena Corporation owns 30% of the voting stock of Tapestry Company, and reports it as an equity method investment. It then pays cash to acquire the remaining 70% of Tapestry’s voting stock. Which statement is false concerning reporting for the acquisition of the remaining 70%, if the acquisition is reported as a merger? a.
88.
b. c. d.
If the total acquisition cost is greater than the fair value of identifiable assets acquired, goodwill is recognized. The equity method investment is written off as a reduction in additional paid-in capital. The assets and liabilities of Tapestry are revalued to fair value. The assets and liabilities of Tapestry will now appear on Asena’s books.
ANS:
b
Topic: Step acquisition LO 5 Nebulus Corporation owns 80% of the voting stock of Suite Company. It reports the 20% interest in the equity section of its balance sheet at $25 million, and all of Suite’s assets and liabilities are reported on Nebulus’ balance sheet. Nebulus acquires the remaining 20% interest for $20 million in cash. At that time, the fair value of Suite’s identifiable net assets was $80 million. As part of the acquisition entry, Nebulus records a. b. c. d.
A loss of $5 million, in income. A $5 million net increase in shareholders’ equity. $5 million in goodwill. A $20 million net reduction in shareholders’ equity.
ANS:
d The acquisition entry is: Noncontrolling interest (equity)
25,000,000 Cash APIC (equity)
89.
20,000,000 5,000,000
Topic: Step acquisition LO 5 Nebulus Corporation owns 30% of the voting stock of Suite Company. It reports the 30% interest as an equity method investment, with a current carrying value of $32 million and a market value of $45 million. Nebulus acquires the remaining 70% interest for $120 million in cash. At that time, the fair value of Suite’s identifiable net assets was $125 million, and Suite’s book value was $45 million. As part of the acquisition entry, Nebulus records a. b. c. d.
A gain of $13 million, in income. Goodwill of $27 million. Goodwill of $107 million. A gain of $5 million, in income.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-31
ANS:
a
The combined acquisition entry is: Identifiable net assets Goodwill
125,000,000 40,000,000 Cash Investment in Suite Gain (income)
90.
91.
92.
120,000,000 32,000,000 13,000,000
Topic: Step acquisition LO 5 Olya Company has a 45% interest in Protech Company, reported using the equity method, carried at $30 million and with an estimated fair value of $50 million. Olya acquires the remaining stock of Protech for $70 million in cash. The fair value of Protech’s identifiable net assets is $95 million. What amount of goodwill is recognized when the remaining stock is acquired? a. b. c. d.
$0 $5 million $20 million $25 million
ANS:
d $70 + $50 - $95 = $25 million
Topic: Step acquisition LO 5 Olya Company has a 70% interest in Protech Company, originally acquired at a cost of $84 million, and reported as a business combination. Olya acquires the remaining 30% of the stock of Protech for $42 million. The fair value of Protech’s identifiable net assets is currently $70 million. What amount of goodwill is recognized when the remaining stock is purchased? a. b. c. d.
$0 $56 million $14 million $90 million
ANS:
a There is no change in control, so Protech’s net assets are not revalued.
Topic: Asset acquisition LO 6 Which statement is true regarding reporting for the acquisition of a group of assets, reported as an asset acquisition? a. b. c. d.
Goodwill is not recognized, even if cost exceeds the fair value of net assets acquired. Contingent consideration is included in the initial measurement of total cost. Consulting fees paid to complete the transaction are expensed. Changes in value estimates are reported retroactively within the measurement period.
ANS:
a
© Cambridge Business Publishers, 2023 2-32
Advanced Accounting, 5th Edition
93.
94.
95.
Topic: Asset acquisition LO 6 Hule Inc. acquires equipment and land from another company for $49 million, and records the transaction as an asset acquisition. The equipment has a fair value of $20 million, and the land has a fair value of $30 million. Neither asset is nonqualifying. At what value does Hule record the equipment? a. b. c. d.
$20 million $19.6 million $19.2 million $24.5 million
ANS:
b ($20/($20 + $30)) x $49 = $19.6 million
Topic: Asset acquisition LO 6 In an asset acquisition, nonqualifying assets include all of the following except a. b. c. d.
Cash HTM debt investments Equity investments with no significant influence Trading debt investments
ANS:
b
Topic: Asset acquisition LO 6 A company acquires cash and equipment of another company for $98 million, and records the transaction as an asset acquisition. Total cash acquired is $20 million, and the equipment has a fair value of $80 million. The company records the equipment at a. b. c. d.
$80 million $78.4 million $78 million $81.6 million
ANS:
c $98 - $20 = $78 million
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-33
PROBLEMS 1.
Topic: Valuation of assets acquired and liabilities assumed LO 1 Cally Company owns current assets with a market value of $4,000,000 and plant and equipment with a market value of $50,000,000. It has liabilities valued at $40,000,000. It also has unreported brand names valued at $5,000,000. Breaker Corporation buys Cally’s assets and liabilities for $75,000,000 in cash. Required Prepare the journal entry Breaker makes to record the acquisition. ANS: Current assets Plant and equipment Brand names Goodwill
4,000,000 50,000,000 5,000,000 56,000,000 Liabilities Cash
2.
40,000,000 75,000,000
Topic: Valuation of assets acquired and liabilities assumed LO 1 Bestvalue Airlines’ balance sheet is as follows (in thousands): Assets Cash Receivables Investments Maintenance supplies Flight equipment (net of $2,000 accumulated depreciation) International routes Total assets
$ 1,400 650 1,000 150 8,500 700 ______ $12,400
Liabilities & Equity Current liabilities Long-term debt Common stock, $0.01 par Additional paid-in capital Retained earnings (deficit) Accumulated other comprehensive income Treasury stock Total liabilities & equity
$ 3,200 5,000 1 5,500 (2,300) 1,999 (1,000) $12,400
Safebuy Airlines acquired Bestvalue in an acquisition reported as a merger. Bestvalue’s cash, receivables, investments, and current liabilities were reported at fair value. Its maintenance supplies had a fair value of $200,000, flight equipment had a fair value of $10 million, and international routes were worth $400,000. Long-term debt had a fair value of $5.1 million. Bestvalue also had an unrecorded intangible, representing leases with favorable terms, worth $600,000, which meets ASC 805 criteria for separate capitalization. Safebuy paid $12 million in cash for Bestvalue. Required Present Safebuy’s journal entry to record the acquisition. Express all dollar amounts in thousands.
© Cambridge Business Publishers, 2023 2-34
Advanced Accounting, 5th Edition
ANS: (in thousands) Cash Receivables Investments Maintenance supplies Flight equipment International routes Leases Goodwill
1,400 650 1,000 200 10,000 400 600 6,050 Current liabilities Long-term debt Cash
3.
3,200 5,100 12,000
Topic: Valuation of assets acquired and liabilities assumed LO 1 Sully Company’s balance sheet is as follows: Assets Cash, receivables Inventories Equity method investments Land, buildings & equipment
Total assets
$ 3,000,000 4,000,000 1,000,000 5,500,000
_________ $13,500,000
Liabilities & Equity Current liabilities Long-term liabilities Capital stock Retained earnings Accumulated other comprehensive loss Treasury stock Total liabilities & equity
$ 2,000,000 6,500,000 2,000,000 3,500,000 (400,000) (100,000) $13,500,000
Pronto Corporation acquires Sully’s assets and liabilities for $50 million in cash. Sully’s cash and receivables, and liabilities are reported at values approximating fair value. However, its inventories are overvalued by $3,000,000, and its equity method investments are undervalued by $2,000,000. Its land, buildings & equipment are overvalued by $2,500,000. The accountants identify the following possible intangible assets attributed to Sully but not currently recorded on its balance sheet:
Skilled workforce Favorable leases Developed technology Prospective customer contracts Synergies on future projects
Fair Value $8,000,000 6,000,000 3,000,000 2,000,000 4,000,000
Required Prepare Pronto’s journal entry to record the acquisition.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-35
ANS: Cash, receivables Inventories Equity method investments Land, buildings & equipment Favorable leases Developed technology Goodwill
3,000,000 1,000,000 3,000,000 3,000,000 6,000,000 3,000,000 39,500,000 Current liabilities Long-term liabilities Cash
4.
2,000,000 6,500,000 50,000,000
Topic: Valuation of identifiable intangible assets LO 1 Parsons Corporation acquires all of the assets and liabilities of Sonata Company at the beginning of 2023, in an acquisition reported as a merger. Developed technology, not reported on Sonata’s balance sheet, is appropriately reported as an acquired identifiable intangible asset. Parsons uses the income approach to value this intangible asset, at the present value of forecasted operating cash flow, net of taxes, capital charges and additional capital expenditures, for the next four years. The following information is collected as part of the valuation process: •
Projected 2023 operating income derived from the developed technology is $4 million before tax. This amount is expected to grow at a rate of 6% yearly.
•
Depreciation and amortization expense included in operating income is $1 million. This amount is expected to be constant during 2023-2026.
•
The tax rate for 2023-2026 is 25%.
•
Additional capital expenditures related to the developed technology are forecasted to be $500,000 in 2023, growing at a rate of 2% yearly.
•
The capital charge on contributory assets is estimated at $200,000. This amount is expected to be constant during 2023-2026.
•
The appropriate risk-adjusted discount rate is 20%.
Required Calculate the value of the developed technology, reported by Parsons as an acquired identifiable intangible asset. Round answers to the nearest dollar and assume cash flows occur at year-end. ANS: Operating income Less income tax expense After-tax operating income Plus depreciation expense Less capital expenditures Less contributory assets capital charge Net cash flow
2023 $4,000,000 (1,000,000) 3,000,000 1,000,000 (500,000)
2024 $4,240,000 (1,060,000) 3,180,000 1,000,000 (510,000)
2025 $4,494,400 (1,123,600) 3,370,800 1,000,000 (520,200)
2026 $4,764,064 (1,191,016) 3,573,048 1,000,000 (530,604)
(200,000) $3,300,000
(200,000) $3,470,000
(200,000) $3,650,600
(200,000) $3,842,444
$3,300,000/1.2 + $3,470,000/(1.2)2 + $3,650,600/(1.2)3 + $3,842,444/(1.2)4 = $9,125,368 © Cambridge Business Publishers, 2023 2-36
Advanced Accounting, 5th Edition
5.
Topic: Recognition of acquired intangibles, goodwill LO 1 ABC Services provides web services to professional service organizations. ABC acquires XYZ Consulting to broaden its service offerings, at a cost of $50,000,000. The book value of XYZ's recorded net assets (all tangibles) is $300,000, and their fair value is $3,000,000. XYZ also possesses the following unreported intangibles, with fair values as listed: Fair Value Customer contracts 4,000,000 Long-time customer relationships 8,000,000 Favorable lease contracts 3,500,000 Patent rights 10,000,000 Required Prepare a schedule to calculate the goodwill recognized for this acquisition. ANS: Identifiable intangibles arising from contractual or other legal rights, or separable intangibles, are capitalized by the acquirer. The customer contracts, favorable lease contracts, and patent rights meet these requirements. Acquisition cost $50,000,000 Fair value of identifiable net assets acquired: Tangible net assets $ 3,000,000 Customer contracts 4,000,000 Favorable lease contracts 3,500,000 Patent rights 10,000,000 20,500,000 Goodwill $29,500,000
Use the following information to answer Questions 6 and 7. Parrott Corporation acquires the assets and liabilities of Swann Company. The fair values of Swann’s reported assets and liabilities are estimated to be as follows at the date of acquisition. Fair Value Dr (Cr) Current assets $ 400 Plant & equipment, net 1,500 Liabilities (1,200) Parrott determines that Swann has not recorded the following intangible assets on its books: Fair Value Completed technology $ 600 Favorable leases 100 Synergies on future projects 250 Assembled workforce 800 These intangibles may or may not all meet the standards for capitalization as identifiable intangible assets. Each of the following questions is independent. Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-37
6.
Topic: Valuation of assets acquired and liabilities assumed LO 1 Parrott pays $8,000 in cash to buy all of Swann’s assets and liabilities. Required a. How much in acquired previously unreported identifiable intangibles will Parrott report? b. What is the fair value of identifiable net assets acquired? c. How much goodwill does Parrott report? ANS: a. b. c.
7.
$600 + $100 = $700 $400 + $1,500 + $700 – $1,200 = $1,400 $8,000 – $1,400 = $6,600
Topic: Measurement of acquisition cost LO 2 Parrott issues 1,000 shares of $0.10 par stock to buy Swann’s assets and liabilities. Parrott’s stock has a market value of $8.50/share. Parrott pays $500 in registration fees to issue the stock, and the fees are paid in cash. Required a. What is Parrott’s credit to common stock (par)? b. What is Parrott’s credit to APIC? c. What is acquisition cost? d. How much goodwill does Parrott report? ANS: a. b. c. d.
8.
1,000 x $0.10 = $100 (1,000 x $8.50) – $100 – $500 = $7,900 (1,000 x $8.50) = $8,500, or $100 + $7,900 + $500 = $8,500 $8,500 – $1,400 = $7,100
Topic: Valuation of assets acquired and liabilities assumed, measurement of acquisition cost LO 1, 2 Vim Company acquired Worth Enterprises for $300 million in cash. This price reflected goodwill of $200 million and identifiable intangible assets of $85 million. Vim also incurred $8 million in acquisition-related legal and advisory services, paid in cash. Required a. In addition to goodwill and identifiable intangible assets, did Vim recognize any acquired tangible net assets, such as inventories, plant and equipment, and liabilities? If so, what was the fair value of tangible net assets at the date of acquisition? b. Prepare the journal entry to record this business combination.
© Cambridge Business Publishers, 2023 2-38
Advanced Accounting, 5th Edition
ANS: a. $300 - $200 - $85 = $15 million b. (in millions) Identifiable intangible assets Goodwill Tangible net assets Merger expenses Cash 9.
85 200 15 8 308
Topic: Assets acquired and liabilities assumed, measurement of acquisition cost LO 1,2 Powell Corporation paid $15 million in cash to acquire the assets and liabilities of Sloan Company. Powell also agreed to make an additional cash payment in the future, with an expected present value of $600,000, if certain performance targets are met. Powell paid legal and consulting fees of $300,000 in cash in connection with the merger. A comparison of book and fair values of Sloan’s reported assets and liabilities follows: (in thousands) Current assets………………………………………………………………….. Property and equipment, net…………………………………………… Patents and trademarks…………………………………………………… Current liabilities…………………………………………………………….. Long-term debt……………………………………………………………….. Net assets…………………………………………………………………………
Book Value $ 600 5,000 200 (400) (3,000) $2,400
Fair Value $ 450 2,000 1,800 (400) (3,200) $ 650
Sloan also has previously unreported developed technology, valued at $1.2 million, meeting ASC Topic 805 criteria for capitalization. Required a. What is the acquisition cost for this transaction? b. Prepare the journal entry or entries made by Powell to record the business combination as a merger. ANS: a. b.
$15,000,000 + $600,000 = $15,600,000 Current assets Property and equipment Patents and trademarks Identifiable intangible: developed technology Goodwill Merger expenses (income) Current liabilities Long-term debt Cash Earnout liability
Test Bank, Chapter 2
450,000 2,000,000 1,800,000 1,200,000 13,750,000 300,000 400,000 3,200,000 15,300,000 600,000
© Cambridge Business Publishers, 2023 2-39
10.
Topic: Assets acquired and liabilities assumed, measurement of acquisition cost, stock options LO 1,2 Adams Industries acquired Baker Supplies in a transaction reported as a merger. Adams paid Baker’s shareholders $100 million in cash and new stock with a fair value of $50 million and par value of $1 million. Adams converted Baker employees’ stock options, valued at $5 million, to Adams stock. $2 million of these options are vested and compensate for services performed prior to the acquisition date. Out-of-pocket acquisition costs were $4 million, paid in cash. The fair values of Baker’s identifiable net assets at the date of acquisition are as follows (in millions): Current assets Plant and equipment Identifiable intangibles Liabilities Fair value of identifiable net assets
$ 5 25 45 (20) $ 55
Required a. What is the total acquisition cost, and the amount of goodwill to be recognized? b. Prepare the journal entry to record this transaction. ANS: (in millions) a. $100 + $50 + $2 = $152 acquisition cost $152 - $55 = $97 goodwill b. Current assets Plant and equipment Identifiable intangibles Goodwill Merger expenses (income) Prepaid compensation expense Liabilities Cash Common stock (par) Additional paid-in capital
5 25 45 97 4 3 20 104 1 54
Use the following information to answer Questions 11, 12 and 13. Each question is independent. Arnprior Corporation acquires all of the assets and liabilities of Bracebridge Company at the beginning of the accounting year. The fair values of Bracebridge’s reported assets and liabilities are estimated to be as follows at the date of acquisition: Tangible assets Liabilities
Fair Value $ 2,000 (1,500)
Arnprior determines that Bracebridge has not recorded the following intangible assets on its books: Customer lists Brand names © Cambridge Business Publishers, 2023 2-40
Fair Value $200 600 Advanced Accounting, 5th Edition
Note: The above intangibles may or may not all meet the standards for capitalization as identifiable intangible assets. 11.
Topic: Valuation of assets acquired and liabilities assumed LO 1 Arnprior pays $6,000 in cash to buy Bracebridge. Required a. What is the fair value of identifiable net assets acquired? b. How much goodwill does Arnprior report? ANS: a. b.
12.
$2,000 + $200 + $600 – $1,500 = $1,300 $6,000 – $1,300 = $4,700
Topic: Measurement of acquisition cost LO 2 Arnprior pays $1,000 in cash and 1,000 shares of $0.50 par stock to buy Bracebridge’s outstanding stock. Arnprior’s stock has a market value of $8/share. Arnprior pays $100 in registration fees to issue the stock, and $150 in consulting fees. All fees are paid in cash. Required Prepare the journal entry to record the acquisition on Arnprior’s books. Arnprior treats the acquisition as a stock acquisition. ANS: Investment in Bracebridge Merger expenses
9,000 150 Cash Common stock (par) Additional paid-in capital
13.
1,250 500 7,400
Topic: Assets acquired and liabilities assumed, measurement of acquisition cost, subsequent changes in estimates LO 1, 2, 3 Arnprior pays $8,000 in cash to buy Bracebridge. Arnprior also agrees to pay Bracebridge’s former owners an additional amount if Bracebridge’s EBITDA exceeds a certain target amount over the next three years. Arnprior values this promise at a present value of $200. Arnprior pays consulting fees of $150 in cash in connection with this acquisition. Required a. Prepare the journal entry or entries Arnprior makes to record the acquisition as a merger. b. Three months after the acquisition, Arnprior determines that the date-of-acquisition fair value of Bracebridge’s tangible assets was really $1,100. Prepare the journal entry Arnprior makes to record this information.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-41
ANS: a. Tangible assets Identifiable intangible assets Goodwill Merger expenses
2,000 800 6,900 150 Liabilities Cash Earnout liability
1,500 8,150 200
b. Goodwill
900 Tangible assets
14.
900
Topic: Earnings contingency LO 2 At the beginning of 2023, Pentron Corporation is in negotiations to acquire all of the stock of Santel Company. Pentron agrees to pay the former shareholders of Santel an additional cash amount at the end of 2025 (three years after the acquisition) that depends on the total reported earnings before interest, taxes, depreciation and amortization (EBITDA) for Santel during 20232025. Pentron will pay $2 for each dollar of total EBITDA above $10,000,000 that Santel reports. Here are Pentron’s expectations for Santel’s total reported EBITDA for 2023-2025. Total EBITDA $ 4,000,000 $ 8,000,000 $ 12,000,000 $ 16,000,000
Probability 0.40 0.10 0.20 0.30
The appropriate discount rate for this earnout is 15%. Required Calculate the amount of the earnout that Pentron should report as part of its cost of acquiring Santel. Round your answer to the nearest thousand dollars. ANS: ($12,000,000 – $10,000,000) x 0.20 x $2 ($16,000,000 – $10,000,000) x 0.30 x $2 $4,400,000/(1.15)3
© Cambridge Business Publishers, 2023 2-42
$ 800,000 3,600,000 $ 4,400,000 $ 2,893,000
Advanced Accounting, 5th Edition
15.
Topic: Earnings Contingency LO 2 To induce the owners of Splunk Company to sell to Patterson Corporation, an earnings contingency was included in the acquisition agreement. Patterson agrees to pay the former owners of Splunk $5 for every dollar of total EBITDA earned over $20 million in the next four years. The payment would be made at the end of four years. Expected total EBITDA in the next four years is as follows: Total EBITDA earned Less than $20 million $20 million 25 million 40 million
Probability 0.60 0.20 0.15 0.05
Required What is the expected present value of the earnout at the date of acquisition, assuming a discount rate of 25%? Round your answer to the nearest thousand dollars. ANS: ($25,000,000 - $20,000,000) x $5 x 0.15 ($40,000,000 - $20,000,000) x $5 x 0.05 $8,750,000/(1.25)4 16.
$3,750,000 5,000,000 $8,750,000 $3,584,000
Topic: Valuation of assets acquired and liabilities assumed, acquisition cost LO 1, 2 Dr. Pepper Snapple Group (DPSG) acquired the assets and liabilities of Turquoise Water Inc., in a merger. The acquisition involves the following payments: Cash paid to Turquoise Water shareholders Cash paid to Morgan Stanley for consulting services New stock issued, 100,000 shares, $0.50 par, fair value at acquisition Stock registration fees, paid in cash Earnings contingency, to be paid in three years, present value
$85,000,000 12,000,000 5,000,000 600,000 2,000,000
Turquoise Water’s balance sheet just prior to the acquisition appears below. information on Turquoise Water’s assets and liabilities is also provided.
Test Bank, Chapter 2
Fair value
© Cambridge Business Publishers, 2023 2-43
Turquoise Water, Inc. Book Value Assets Current assets Plant and equipment, net Patents and trademarks Total assets Liabilities & Equity Current liabilities Long-term liabilities Common stock, par value Additional paid-in capital Retained earnings Accumulated OCI Treasury stock Total liabilities & equity
Fair Value
$ 1,000,000 41,000,000 3,400,000 $ 45,400,000
$
$
400,000 40,000,000 500,000 8,500,000 (2,000,000) (1,400,000) (600,000) $ 45,400,000
800,000 10,000,000 20,000,000
400,000 41,000,000
In addition to the assets reported on Turquoise Water’s balance sheet, the following previously unreported intangible assets are identified: Fair Value Bottlers’ franchise rights $ 10,400,000 Skilled workforce 15,000,000 Non-competition agreements 4,000,000 Expected expansion into new product lines 5,000,000 Order backlogs 2,000,000 Required a. Prepare the journal entry DPSG makes to record this acquisition as a merger. b. Now assume DPSG acquires all of the stock of Turquoise Water. Prepare the journal entry DPSG makes to record this acquisition as a stock acquisition. ANS: a. Current assets Plant and equipment Patents and trademarks Bottlers’ franchise rights Non-competition agreements Order backlogs Merger expenses Goodwill
800,000 10,000,000 20,000,000 10,400,000 4,000,000 2,000,000 12,000,000 86,200,000 Current liabilities Long-term liabilities Cash Common stock, par Additional paid-in capital Earnout liability
© Cambridge Business Publishers, 2023 2-44
400,000 41,000,000 97,600,000 50,000 4,350,000 2,000,000
Advanced Accounting, 5th Edition
b. Investment in Turquoise Water Merger expenses
92,000,000 12,000,000 Cash Common stock, par Additional paid-in capital Earnout liability
17.
97,600,000 50,000 4,350,000 2,000,000
Topic: Valuation of assets acquired and liabilities assumed, acquisition cost LO 1, 2 IBM acquired all of DemandTec’s assets and liabilities. DemandTec’s assets and liabilities at the date of acquisition are as follows:
Cash & receivables Inventories Plant & equipment, net Loans payable
Book Value Dr (Cr) $ 2,000,000 10,000,000 30,000,000 (35,000,000)
Fair Value Dr (Cr) $ 1,000,000 5,000,000 11,000,000 (36,000,000)
IBM identifies the following intangibles that exist at the acquisition date but are not currently reported on DemandTec’s books. Not all of these may qualify as separately reported identifiable intangible assets, per ASC Topic 805. Fair Value $ 10,000,000 3,000,000 6,000,000 30,000,000
Brand name Potential contracts with prospective customers Order backlogs Technically skilled workforce
The acquisition terms are as follows: • $5,000,000 in cash paid to the former owners of DemandTec. •
200,000 new shares of IBM common stock, par value $0.10 and market value $150/share. Registration fees, paid in cash, were $500,000.
•
$2,000,000 in cash paid to Credit Suisse for consulting services.
•
Earnings contingency with an expected present value of $4,000,000 at the date of acquisition.
Required Prepare the journal entry to record this acquisition on IBM’s books.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-45
ANS: Cash & receivables Inventories Plant & equipment Brand name Order backlogs Goodwill Merger expenses
1,000,000 5,000,000 11,000,000 10,000,000 6,000,000 42,000,000 2,000,000 Loans payable Earnings contingency liability Cash Common stock APIC
18.
36,000,000 4,000,000 7,500,000 20,000 29,480,000
Acquisition with stock options LO 1, 2 Fir Corporation acquired the net assets of Pine Inc. by issuing one million shares of $.01 par value stock with a total fair value of $35 million. In addition, Fir converted Pine’s unvested employee stock options to Fir stock. The stock options are valued at $3 million, of which $2 million is considered compensation for work performed prior to the acquisition. Registration fees for the stock issued were $400,000, and consulting fees were $600,000, all paid in cash. Pine’s reported assets had a fair value of $25 million, consisting of $5 million in current assets and $20 million in plant and equipment. The fair value of Pine’s liabilities was $30 million. Previously unreported technology owned by Pine, and capitalizable per ASC 805, was valued at $2.5 million. Required Prepare the journal entry made by Fir Corporation to record the acquisition as a merger. ANS: Current assets Plant & equipment Technology Merger expenses Prepaid compensation expense Goodwill
5,000,000 20,000,000 2,500,000 600,000 1,000,000 39,500,000 Liabilities Cash Common stock APIC
© Cambridge Business Publishers, 2023 2-46
30,000,000 1,000,000 10,000 37,590,000
Advanced Accounting, 5th Edition
19.
Valuation of goodwill and consideration paid LO 1, 2 Hally Corporation acquired the net assets of Izzy Inc. by paying Izzy’s shareholders $65 million in cash, and reported the transaction as a merger. In addition, stock-based compensation awards attributable to pre-combination services had a fair value of $4.5 million, and stock issued to holders of vested performance share units were valued at $2.5 million. Acquisition-related legal and advisory fees paid to outside consultants, in cash, totaled $1.25 million. Compensation related to employee retention plans for the period following acquisition, paid in cash at the date of acquisition, totaled $0.75 million. An estimated $1 million associated with these retention plans remains to be paid in future years. The fair values of Izzy’s reported current assets and noncurrent assets at the date of acquisition were $2 million and $40 million, respectively, and the fair value of its reported liabilities was $36 million. Izzy also had unreported identifiable intangible assets valued at $3 million and unreported liabilities of $5 million. Required a. Compute the total acquisition cost for this business combination. If any payments are excluded from your calculation, explain why they are excluded and specify the appropriate accounting for these payments. b. Compute the goodwill recognized for this business combination. c. Prepare the journal entry to record the business combination. ANS: a. Cash paid to Izzy’s shareholders Stock-based compensation for pre-combination services Vested performance shares Acquisition cost
$65,000,000 4,500,000 2,500,000 $72,000,000
Consulting fees are expensed as incurred. Compensation for future services is expensed over the related service period. b. Acquisition cost Fair value of identifiable net assets: Current assets Noncurrent assets Intangibles Liabilities Goodwill
$72,000,000 $2,000,000 40,000,000 3,000,000 (41,000,000)
4,000,000 $68,000,000
c. Current assets Noncurrent assets Intangibles Merger expenses Goodwill
2,000,000 40,000,000 3,000,000 1,250,000 68,000,000 Liabilities Cash APIC
Test Bank, Chapter 2
41,000,000 66,250,000 7,000,000 © Cambridge Business Publishers, 2023 2-47
Use the following information to answer questions 20 – 22 below. Drover Corporation acquired all of Exeter Company’s assets and liabilities in an all-cash acquisition. Drover recorded the transaction as follows: Current assets Plant assets Identifiable intangibles Goodwill
500,000 20,000,000 4,500,000 15,000,000 Liabilities Cash
20.
17,000,000 23,000,000
Topic: Changes in estimated valuations LO 3 Subsequent to the acquisition, Drover obtains information that Exeter’s plant assets have a fair value of $15 million. Required Prepare the journal entry needed to record this information, if the change in value occurs: a. During the measurement period. b. Outside of the measurement period. ANS: a. Goodwill
5,000,000 Plant assets
5,000,000
b. Loss (income)
5,000,000 Plant assets
21.
5,000,000
Topic: Changes in estimated valuations LO 3 Subsequent to the acquisition, Drover obtains information that Exeter’s plant assets have a fair value of $25 million. Required Prepare the journal entry needed to record this information, if the change in value occurs: a. During the measurement period. b. Outside of the measurement period. ANS: a. Plant assets
5,000,000 Goodwill
b.
5,000,000
No entry; writeups of plant assets are not recorded using normal accounting
© Cambridge Business Publishers, 2023 2-48
Advanced Accounting, 5th Edition
22.
Topic: Changes in estimated valuations, bargain purchase LO 3, 4 Subsequent to the acquisition, Drover obtains information that Exeter has additional identifiable intangibles with a fair value of $18 million. Required Prepare the journal entry needed to record this information, if the change in value occurs: a. During the measurement period. b. Outside of the measurement period. ANS: a. Identifiable intangibles
18,000,000 Goodwill Bargain gain (income)
b. 23.
15,000,000 3,000,000
No entry; identifiable intangibles are not recorded using normal accounting.
Topic: Subsequent value changes LO 3, 5 Plattsburgh Company acquired all of Sedona Corporation’s assets and liabilities for $40 million in cash. At the date of acquisition, Sedona’s identifiable net assets had a fair value of $10 million. Required For each of the following value changes occurring six months subsequent to the acquisition, prepare the journal entry, if any, to record the revaluation. Treat each change independently. a.
b.
c. d.
e.
f. g.
It was determined that brand names valued at $1 million at the date of acquisition, and capitalized per ASC Topic 805 requirements, actually had a value of $5 million at the date of acquisition. A downturn in the economy subsequent to the acquisition resulted in a $2 million decline in the value of acquired developed technology, capitalized at the date of acquisition per ASC Topic 805 requirements. Land valued at $6 million at the date of acquisition increased in value to $8 million due to an increased demand for real estate in the last six months. The acquisition included an earnout provision, valued at $3 million at the date of acquisition. Due to an upturn in demand for Sedona’s products in the last six months, the expected present value of the earnout is now $5 million. The acquisition included an earnout provision, valued at $3 million at the date of acquisition. New information is obtained about Sedona’s expected future performance as of the date of acquisition, increasing its expected present value to $4 million at the date of acquisition. It is determined that Sedona’s acquisition-date liabilities omitted a pending lawsuit valued at $1.5 million. Sedona’s acquired liabilities, reported by Plattsburgh, include a pending lawsuit with a date-of-acquisition estimated value of $10 million. Because of events occurring subsequent to the acquisition, it is determined that the lawsuit’s value has declined to $2 million.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-49
h.
i.
Sedona’s acquired assets include AFS debt investments with a date-of-acquisition value of $2 million. These investments increase in value to $2.5 million due to a decline in market interest rates subsequent to acquisition. Sedona’s acquired assets include AFS debt investments with a date-of-acquisition value of $2 million. It is determined that some AFS debt investments were omitted from the inventory of acquired investments. The value of these omitted investments was $1.5 million.
ANS: a. Brand names (intangible asset)
4,000,000 Goodwill
4,000,000
b. Impairment loss (income)
2,000,000 Developed technology (intangible asset)
c.
2,000,000
Not reported
d. Loss on earnout (income)
2,000,000 Earnings contingency liability
2,000,000
e. Goodwill
1,000,000 Earnings contingency liability
1,000,000
f. Goodwill
1,500,000 Lawsuit liability
1,500,000
g. Lawsuit liability
8,000,000 Gain on lawsuit (income)
8,000,000
h. AFS investments
500,000 Gain on AFS investments (OCI)
500,000
i. AFS investments
1,500,000 Goodwill
© Cambridge Business Publishers, 2023 2-50
1,500,000
Advanced Accounting, 5th Edition
24.
Topic: Earnings contingency and subsequent revaluation LO 2, 3 Patterson Corporation acquired Slees Company, with the entire consideration in the form of an earnout. Patterson Corporation agreed to pay the former owners of Slees Company three times total operating income earned over the next three years. The payment, if any, would be made at the end of three years. Patterson originally reported the earnout at $350 million. Required a. Assume Patterson used a discount rate of 20% to record the earnout at the date of acquisition. What did Patterson expect total operating income over the next three years to be? Round your answer to the nearest million. b. What factors determined the discount rate used in Part a.? c. Patterson estimated the fair value of Slees’ identifiable net assets to be $150 million at the date of acquisition. How did the existence of the earnout affect the entry Patterson made to record the acquisition? d. During the first year, the value of the earnout increased to $375 million due to the passage of time. How did Patterson record this increase in value? ANS: a.
Let E = Expected operating income $350 = 3E/(1.2)3 E = $201.6 million
b.
The discount rate should be the risk-free rate adjusted for the uncertainty connected with the payout. Factors include the current prime rate and variability in expected future performance, which is a function of the predicted risk associated with economic variables impacting the company’s ability to perform.
c.
Without the earnout, no consideration was paid and Patterson would have reported a bargain gain of $150 million. Since the earnout was valued at $350 million, Patterson reported goodwill of $200 million (= $350 – $150 million).
d.
The passage of time is a subsequent event. The entry is as follows (in millions): Loss (income)
25 Earnout liability
25.
25
Topic: Income effects of measurement period adjustments LO 3 On December 1, 2023, Pronto Corporation acquired all of the assets and liabilities of Slipup Company. The acquisition generated goodwill of $50,000,000. At the date of acquisition, Slipup’s identifiable intangibles had an estimated fair value of $2,400,000, and a 2-year life, straight-line. On June 30, 2024, new information reveals that the fair value of the intangibles was $3,600,000 at the date of acquisition. Pronto’s accounting year ends on December 31. Required Prepare the journal entry or entries to record the change in valuation of Slipup’s intangibles on June 30, 2024, assuming the valuation change is within the measurement period, and depreciation has already been recorded through June 30, 2024.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-51
ANS: Identifiable intangibles Amortization expense
850,000 350,000
Goodwill To correct the valuation of acquired equipment and related depreciation.
1,200,000
The uncorrected balance in the intangibles account at June 30, 2024 is $2,400,000 x 17/24 = $1,700,000. The corrected balance is $3,600,000 x 17/24 = $2,550,000. The correction to the intangibles account is $850,000 = $2,550,000 - $1,700,000. The total amortization expense correction over the 7 prior months = ($3,600,000 - $2,400,000) x 7/24 = $350,000. Although one month of the correction belongs in 2023, it is recognized in 2024. 26.
Topic: Income effects of measurement period adjustments LO 3 On November 1, 2023, Pronto Corporation acquired all of the assets and liabilities of Slipup Company. The acquisition generated goodwill of $30,000,000. At the date of acquisition, Slipup’s equipment had an estimated fair value of $15,000,000, and a 4-year life, straight-line. On April 30, 2024, new information reveals that the equipment’s fair value was $25,000,000 at the date of acquisition. Pronto’s accounting year ends on December 31. Required Prepare the journal entry or entries to record the change in valuation of Slipup’s equipment on April 30, 2024, assuming the valuation change is within the measurement period, and depreciation has already been recorded through April 30. ANS: Equipment, net Depreciation expense
8,750,000 1,250,000
Goodwill To correct the valuation of acquired equipment and related depreciation.
10,000,000
The adjustment, net of depreciation, to the equipment account = ($25,000,000 - $15,000,000) x (42/48) = $8,750,000. Alternatively, the correction to depreciation expense = [($25,000,000 $15,000,000)/4] x (6/12) = $1,250,000. Although two months of the depreciation expense adjustment is related to 2023, it is recognized as part of 2024 depreciation.
© Cambridge Business Publishers, 2023 2-52
Advanced Accounting, 5th Edition
27.
Topic: Income effects of measurement period adjustments LO 3 On September 30, 2023, Pepper Corporation acquired all of the assets and liabilities of Salt Company. The acquisition generated goodwill of $50,000,000. At the date of acquisition, identifiable intangibles related to developed technology were reported at a value of $13,800,000, and subsequently amortized using an estimated life of 3 years, straight-line. On March 31, 2024, new information reveals that the technology’s fair value was $3,000,000 at the date of acquisition. Pepper’s accounting year ends on December 31. Round answers to the nearest dollar if necessary. Required Prepare the journal entry or entries to record the change in valuation of the developed technology on March 31, 2024, assuming the valuation change is within the measurement period, and a. b.
Amortization on the identifiable intangible has already been recorded through March 31, 2024. Amortization on the identifiable intangible has not yet been recorded for the first quarter of 2024.
ANS: a. Goodwill
10,800,000 Identifiable intangibles Amortization expense To correct the valuation of acquired technology and related amortization.
9,000,000 1,800,000
The adjustment, net of amortization, to the intangibles account = ($3,000,000 - $13,800,000) x (30/36) = $9,000,000. Alternatively, the correction to amortization expense = [($3,000,000 $13,800,000)/3] x (6/12) = $1,800,000. Although three months of the amortization expense adjustment is related to 2023, it is recognized as an adjustment to 2024 amortization. b.
The solution below splits the entries into two parts to clarify the reasoning. Goodwill
10,800,000 Identifiable intangibles 9,900,000 Amortization expense 900,000 To correct the valuation of acquired technology and related amortization as of the end of 2023. Now the identifiable intangibles balance is corrected as of the start of 2024, and the first quarter’s amortization expense is recorded normally: Amortization expense 250,000 Identifiable intangibles 250,000 To record amortization expense for the first quarter of 2024. $250,000= ($3,000,000/3) x 3/12. The entries may be handled in different ways. However, in both a. and b., the total amortization expense recorded in 2024 must be $(650,000), and the intangibles balance at March 31, 2024 is $2,500,000 (= $3,000,000 – ($3,000,000/3 x ½). The amounts already recorded differ between scenarios a. and b. and therefore the corrections are different.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-53
28.
Topic: Intangibles valuation and measurement changes LO 1, 3 Fox Company acquires Gerbil Inc. for $15 million in cash, and reports it as a merger. The fair value of Gerbil’s tangible net assets is $1 million. Gerbil also has previously unreported developed technology, reportable following ASC 805 requirements. Fox uses the income approach to value the technology, using a 10% discount rate. At the date of acquisition, cash flows are estimated to be $2 million each year for the next three years. Required a. Estimate the value of the developed technology at the date of acquisition. Assume the yearly cash flows take place at the end of each year, and round your answer to the nearest thousand. b. Prepare the entry to record the merger. c. Two months after the merger, new information becomes available changing the expected cash flows from the developed technology to $2.5 million per year. Prepare the entry, if any, to record the new information when (1) the new estimate clarifies the value of the developed technology at the date of acquisition, or (2) the new estimate is the result of events occurring subsequent to the acquisition. Ignore amortization. ANS: (amounts are in thousands) a. Present value of $2 million per year for 3 years at 10% = $4,974 b. Tangible net assets Developed technology Goodwill Cash c.
(1)
15,000
Present value of $2.5 million per year for 3 years at 10% = $6,217 Correction = $6,217 - $4,974 = $1,243
Developed technology
1,243 Goodwill
(2)
1,000 4,974 9,026
1,243
No entry, because increases in the value of reported intangible assets are not reported using normal GAAP.
© Cambridge Business Publishers, 2023 2-54
Advanced Accounting, 5th Edition
29.
Topic: Bargain purchase LO 4 Plains Company pays $2,500,000 in cash to acquire the assets and liabilities of Southwest Corporation. Southwest’s balance sheet at the date of acquisition, including fair values of reported assets and liabilities, appears below. In addition, Southwest has previously unreported technology valued at $5,000,000. Southwest Corporation Book Value
Fair Value
Assets Current assets Plant & equipment, net Total assets
$ 5,000,000 20,000,000 $ 25,000,000
$ 2,000,000 18,000,000
Liabilities & Equity Liabilities Capital stock Retained earnings AOCI Total liabilities & equity
$ 22,000,000 4,000,000 (950,000) (50,000) $ 25,000,000
22,000,000
Required Prepare Plains’ journal entry to record its acquisition of Southwest. ANS: Current assets Plant & equipment Identifiable intangibles
2,000,000 18,000,000 5,000,000 Liabilities Cash Gain on purchase (income)
Test Bank, Chapter 2
22,000,000 2,500,000 500,000
© Cambridge Business Publishers, 2023 2-55
30.
Topic: Valuation of assets acquired and liabilities assumed, acquisition cost, bargain purchase LO 1, 2, 4 Delight Candy acquires all of the assets and liabilities of Orbit Brands. Delight incurs the following costs for the acquisition: • • • •
5,000,000 shares of new Delight common stock, par value $0.10/share, market value $6/share, issued to the former shareholders of Orbit Registration fees connected with issuing the new shares, $200,000, paid in cash $1,000,000 in cash paid to retire the outstanding Orbit stock Consulting fees paid to Goldman Sachs, in cash: $1,100,000
The balance sheet of Orbit immediately prior to the acquisition is as follows: Orbit Brands Assets Current assets Plant & equipment, net Trademarks Total assets Liabilities & Equity Current liabilities Long-term liabilities Capital stock Retained earnings Accumulated other comprehensive income Treasury stock Total liabilities & equity
Book Value
Fair Value
$ 8,400,000 40,000,000 1,000,000 $ 49,400,000
$ 6,000,000 30,000,000 5,000,000
$
400,000 44,000,000
400,000 45,000,000 4,000,000 2,000,000 1,000,000 (3,000,000) $ 49,400,000
In addition to the assets and liabilities already reported, Orbit has the following previously unrecorded intangible assets that meet the requirements for capitalization: Intangible Asset Brand names Secret formulas
Fair Value $ 8,000,000 20,000,000
Required a. Prepare the journal entry or entries to record the acquisition on Delight’s books. b. Assume the same information as above, but Orbit has an additional previously unreported intangible that meets the requirements for capitalization: a noncompetition agreement with a fair value of $10,000,000. All fair value calculations have been double checked for accuracy and found to be correct. Make the journal entry or entries to record the acquisition on Delight’s books.
© Cambridge Business Publishers, 2023 2-56
Advanced Accounting, 5th Edition
ANS:
a. Current assets Plant & equipment Trademarks Brand names Secret formulas Goodwill Merger expenses
6,000,000 30,000,000 5,000,000 8,000,000 20,000,000 6,400,000 1,100,000 Current liabilities Long-term liabilities Cash Common stock APIC
400,000 44,000,000 2,300,000 500,000 29,300,000
b. Current assets Plant & equipment Trademarks Brand names Secret formulas Noncompetition agreement Merger expenses
6,000,000 30,000,000 5,000,000 8,000,000 20,000,000 10,000,000 1,100,000 Current liabilities Long-term liabilities Cash Common stock APIC Gain on acquisition (income)
Test Bank, Chapter 2
400,000 44,000,000 2,300,000 500,000 29,300,000 3,600,000
© Cambridge Business Publishers, 2023 2-57
31.
Topic: Valuation of assets and liabilities, acquisition cost, bargain purchase LO 1, 2, 4 Schenk Corporation’s balance sheet immediately prior to its acquisition by Piaget Company is as follows: Schenk Corporation Book Value Fair Value Assets Current assets $ 3,000,000 $ 2,000,000 Plant & equipment, net 24,000,000 18,000,000 Total assets $ 27,000,000 Liabilities & Equity Liabilities Common stock Additional paid-in capital Retained earnings AOCI Total liabilities & equity
$ 23,220,000 60,000 3,400,000 400,000 (80,000) $ 27,000,000
23,000,000
In addition to the assets already reported by Schenk, previously unreported identifiable intangible assets valued at $10,000,000 are identified as owned by Schenk Corporation. These assets are appropriately recorded by Piaget as assets. Piaget Company issues 200,000 shares of new $0.10 par common stock with a market value of $75/share to acquire Schenk’s assets and liabilities. Stock registration fees are $300,000 and costs for the services of outside accountants and lawyers are $500,000, both paid in cash. Required a. Prepare Piaget’s entry to record the acquisition. b. Now assume Piaget Company issues 50,000 shares of $0.10 par common stock with a market value of $75/share to acquire Schenk’s assets and liabilities. Registration fees for the stock issue are $100,000 and out of pocket costs for the services of outside accountants and lawyers are $125,000, both paid in cash. The terms of the merger include an earnings contingency. Piaget Company estimates the expected present value of the payout on the earnings contingency to be $200,000. Prepare Piaget’s entry to record the acquisition.
© Cambridge Business Publishers, 2023 2-58
Advanced Accounting, 5th Edition
ANS: a. Current assets Plant & equipment Identifiable intangibles Goodwill Merger expenses
2,000,000 18,000,000 10,000,000 8,000,000 500,000 Liabilities Common stock APIC Cash
23,000,000 20,000 14,680,000 800,000
b. Current assets Plant & equipment Identifiable intangibles Merger expenses
2,000,000 18,000,000 10,000,000 125,000 Liabilities Earnings contingency liability Common stock APIC Cash Gain on purchase (income)
32.
23,000,000 200,000 5,000 3,645,000 225,000 3,050,000
Topic: Bargain purchase LO 2, 4 Frank Inc. acquired Gorman Company and reported the acquisition as a merger. Consideration paid consisted of $30 million in cash and 700,000 shares of $0.01 par common stock with a fair value of $45 per share. The estimated fair value of Gorman’s tangible assets was $455 million, and its liabilities had a fair value of $400 million. Gorman also has intangible assets valued at $10 million, which are appropriately capitalized per ASC 805. Required Prepare the entry to record the merger. ANS: Tangible assets Intangible assets
455,000,000 10,000,000 Liabilities Cash Common stock APIC Gain on purchase (income)
Test Bank, Chapter 2
400,000,000 30,000,000 7,000 31,493,000 3,500,000
© Cambridge Business Publishers, 2023 2-59
33.
Topic: Assets acquired and liabilities assumed, measurement of acquisition cost, in-process R&D LO 1, 2, 5 Date-of-acquisition information on an acquired company’s reported assets and liabilities appears below:
Current assets Property, plant, and equipment, net Total assets Liabilities Capital stock Retained earnings Total liabilities and equity
Book Value $ 3,000 10,000 $ 13,000
Fair Value $ 1,500 5,000
$ 8,000 1,000 4,000 $ 13,000
7,600
The following amounts were paid by the acquiring company: Cash consideration to the former owners Fair value of 1,000,000 shares of new no-par common stock issued Registration fees on new stock issued, paid in cash Accounting, consulting, and attorney services, paid in cash Fair value of earnings contingency
$35,000 70,000 2,000 5,000 500
The acquired company has the following previously unreported intangible assets. Not all of them meet the criteria for separate recognition as assets. Favorable lease agreements Developed technology Future product improvements Optimization of product and service delivery In-process research and development projects
$ 3,000 18,000 4,000 15,000 22,000
Required The acquiring company records the assets and liabilities of the acquired company directly on its books. Prepare the journal entry the acquiring company made to record the acquisition. ANS: Current assets Property, plant and equipment Favorable lease agreements Developed technology In-process R&D Goodwill Merger expenses
1,500 5,000 3,000 18,000 22,000 63,600 5,000 Liabilities Cash Capital stock Earnout liability
© Cambridge Business Publishers, 2023 2-60
7,600 42,000 68,000 500
Advanced Accounting, 5th Edition
34.
Topic: Valuation of assets acquired and liabilities assumed, acquisition cost, subsequent value changes, preacquisition contingency, in-process R&D LO 1, 2, 3, 5 Serano Corporation’s trial balance is as follows:
Cash and receivables Inventories Property, plant, and equipment, net Liabilities Capital stock Retained earnings
Serano Dr (Cr) $ 200 600 7,500 (7,600) (720) 20
An analysis of Serano’s assets and liabilities reveals that its inventories are overvalued by $250 and its property, plant and equipment is overvalued by $2,000. In addition, the following items are not currently reported on Serano’s balance sheet:
• • •
Customer contracts, valued at $25 In-process research and development, valued at $100 Expected future warranty liabilities with a present value of $20
Pago issues new stock with a market value of $700 to acquire the assets and liabilities of Serano. Stock registration fees are $40, paid in cash. Consulting, accounting, and legal fees connected with the merger are $80, paid in cash. In addition, Pago enters into an earnings contingency agreement, whereby Pago will pay the former shareholders of Serano an additional amount if Serano’s performance meets certain minimum levels. The present value of the contingency is estimated at $30. Required a. Prepare the journal entry Pago makes to record the acquisition. b. Now assume that during the measurement period, new information comes in regarding the value of Serano’s property, plant and equipment at the date of acquisition. It is determined that the property was actually worth $400 less than previously estimated. Make the entry to record this new information.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-61
ANS: a. Cash and receivables Inventories Property, plant & equipment Identifiable intangibles Goodwill Merger expenses
200 350 5,500 125 2,175 80 Liabilities Cash Earnings contingency liability Capital stock
7,620 120 30 660
b. Goodwill
400 Property, plant & equipment
35.
400
Topic: Valuation of assets acquired and liabilities assumed, acquisition cost, in-process R&D, deferred taxes LO 1, 2, 5 International Auto (IA) acquires Genuine Parts, Inc. (GP). The acquisition involves the following payments: Cash paid to GP Cash paid to consultants and lawyers New stock issued, 1,000 shares, $2 par Stock registration fees, paid in cash
$ 5,000 1,200 36,000 900
Here is GP’s balance sheet at the date of acquisition. Fair value information on GP’s assets and liabilities is also provided. Genuine Parts, Inc. Book value
Fair value
Assets Current assets Plant assets, net Trademarks Total assets
$ 1,000 27,000 3,400 $31,400
$ 1,200 20,000 6,000
Liabilities & Equity Current liabilities Long-term liabilities Common stock, par value Additional paid-in capital Retained earnings Treasury stock Total liabilities & equity
$ 400 26,000 500 8,500 (3,400) (600) $31,400
400 25,000
© Cambridge Business Publishers, 2023 2-62
Advanced Accounting, 5th Edition
In addition to the assets reported on GP’s balance sheet, the following previously unreported intangible assets are identified. Fair Value $ 900 4,000 1,500
Licensing agreements Order backlogs In-process R&D The acquisition also results in a deferred tax asset valued at $1,000.
Required IA acquires all of the assets and liabilities of GP. Prepare the journal entry IA makes to record this acquisition. ANS: Current assets Plant assets Identifiable intangibles Deferred tax assets Goodwill Merger expenses
1,200 20,000 12,400 1,000 31,800 1,200 Current liabilities Long-term liabilities Cash Common stock APIC
36.
400 25,000 7,100 2,000 33,100
Topic: Valuation of assets acquired and liabilities assumed, acquisition cost, in-process R&D, preacquisition contingency, deferred taxes LO 1, 2, 5 Bed & Bath buys all of Costless Company’s assets and liabilities in a nontaxable acquisition. Costless’ balance sheet at the date of acquisition, including fair value information on its reported assets and liabilities, is as follows: Book Value Dr (Cr)
Fair Value Dr (Cr)
Assets Cash, receivables Inventories Property and equipment Total assets
$ 1,000,000 5,000,000 60,000,000 $ 66,000,000
$
Liabilities & Equity Accounts and notes payable Common stock Additional paid-in capital Retained earnings Total liabilities and equity
$ 30,000,000 500,000 15,000,000 20,500,000 $ 66,000,000
30,500,000
Test Bank, Chapter 2
800,000 3,000,000 35,000,000
© Cambridge Business Publishers, 2023 2-63
Assets and liabilities attributed to Costless, not currently reported on its books are: Fair value $1,800,000 1,500,000
In-process R&D Warranty liabilities
In addition, a deferred tax asset of $2,500,000 is recognized as part of the acquisition. The acquisition terms are as follows: • Bed & Bath paid Costless’ shareholders a total of $20,000,000 in cash. • Bed & Bath issued a total of 2,000,000 new shares of its common stock to Costless’ shareholders. Bed & Bath’s shares have a par value of $0.01/share and a total fair value of $50,000,000. Bed & Bath paid $500,000 in cash for registration fees to issue the shares. • Bed & Bath paid $750,000 to Goldman Sachs for merger advisement, all paid in cash. Required a. Explain why a deferred tax asset might be recorded for this acquisition. b. Prepare the journal entry to record this acquisition on Bed & Bath’s books. ANS: a.
The fair values of Costless’ identifiable assets are mostly less than book value. Because the acquisition is nontaxable, write-offs of these assets will appear on Bed & Bath’s books at amounts that are lower than allowed tax deductions. Therefore, tax expense will be higher than taxes owed in future years, creating an asset that will decline over time.
b. Cash, receivables Inventories Property and equipment Identifiable intangibles Deferred tax asset Merger expenses Goodwill
800,000 3,000,000 35,000,000 1,800,000 2,500,000 750,000 58,900,000 Accounts and notes payable Warranty liabilities Cash Common stock APIC
© Cambridge Business Publishers, 2023 2-64
30,500,000 1,500,000 21,250,000 20,000 49,480,000
Advanced Accounting, 5th Edition
37.
Topic: Acquired deferred taxes LO 5 Peabody Company acquires all of the assets and liabilities of Shea Company in a nontaxable acquisition at the beginning of the year, reporting the acquisition as a merger. The tax basis of Shea’s plant assets was $8 million. Their date-of-acquisition fair values totaled $10 million. The plant assets have an average remaining life, as of the date of acquisition, of 20 years. During the year, Peabody reports income before depreciation on Shea’s plant assets of $3.5 million. Assume a tax rate of 25%. Required a. At what value does Peabody report acquired deferred taxes at the date of acquisition? Is this an asset or liability? Explain. b. Prepare Peabody’s journal entry to record income taxes for the year. Report taxes owed as taxes payable. ANS: a.
b.
($10,000,000 – $8,000,000) x 25% = $500,000 This amount is reported as an acquired deferred tax liability. Peabody will only be able to deduct depreciation based on the lower $8 million value, but it will report depreciation expense based on the higher $10 million value. Therefore, in future years, it will pay more taxes than it reports as tax expense, due to the lower deductible depreciation, and the difference is a liability at the date of acquisition. Tax expense = [$3,500,000 – ($10,000,000/20)] x 25% = $750,000 Taxes payable = [$3,500,000 – ($8,000,000/20)] x 25% = $775,000 2021 entry: Tax expense Deferred tax liability
750,000 25,000 Taxes payable
38.
775,000
Topic: Acquired deferred taxes LO 5 PNC Corporation acquires all of the assets and liabilities of SPN Company in a nontaxable acquisition at the beginning of the year, reporting the acquisition as a merger. The tax basis of SPN’s buildings and equipment was $35 million. Their date-of-acquisition fair values totaled $15 million. The buildings and equipment have an average remaining life, as of the date of acquisition, of 20 years. During the year, PNC reports income before depreciation on SPN’s buildings and equipment of $4 million. Assume a tax rate of 25%. Required a. At what value does PNC report acquired deferred taxes at the date of acquisition? Is this an asset or liability? Explain. b. Prepare PNC’s journal entry to record income taxes for the year. Report taxes owed as taxes payable.
Test Bank, Chapter 2
© Cambridge Business Publishers, 2023 2-65
ANS: a.
b.
($35,000,000 – $15,000,000) x 25% = $5,000,000. This amount is reported as an acquired deferred tax asset. PNC will be able to deduct depreciation based on the higher $35 million value, but it will report depreciation expense based on the lower $15 million value. Therefore, it can look forward to paying less in taxes than it reports as tax expense, due to the higher deductible depreciation, and the difference is an asset at the date of acquisition. Tax expense = [$4,000,000 – ($15,000,000/20)] x 25% = $812,500 Taxes payable = [$4,000,000 – ($35,000,000/20)] x 25% = $562,500 Tax expense
812,500 Taxes payable Deferred tax asset
39.
562,500 250,000
Topic: Assets acquired and liabilities assumed, measurement of acquisition cost, preacquisition contingencies, deferred taxes LO 1, 2, 5 Date-of-acquisition information on Fizzy Beverage’s assets and liabilities appears below: Current assets Property, plant, and equipment, net Total assets
Book Value $ 2,000 14,000 $ 16,000
Fair Value $ 1,500 5,000
Liabilities Capital stock Retained earnings Accumulated other comprehensive loss Treasury stock Total liabilities and equity
$ 9,000 1,500 6,800 (500) (800) $ 16,000
9,500
Cola King Company acquires the assets and liabilities of Fizzy Beverage, paying the following amounts: Cash consideration to the former owners $50,000 Fair value of new no-par common stock issued 60,000 Registration fees on new stock issued, paid in cash 1,000 Accounting, consulting, and attorney services, paid in cash 4,000 Fizzy has the following previously unreported intangible assets meeting the criteria for separate recognition as identifiable intangible assets. Favorable lease agreements Developed technology
$ 5,000 40,000
The following liabilities previously unreported by Fizzy meet the criteria for separate recognition as acquired liabilities. Deferred tax liabilities Warranty liabilities © Cambridge Business Publishers, 2023 2-66
$ 4,000 8,000
Advanced Accounting, 5th Edition
Required Cola King records the assets and liabilities of Fizzy directly on its books. Prepare the journal entry Cola King made to record the acquisition. ANS: Current assets Property, plant, and equipment Identifiable intangible assets Goodwill Merger expenses
1,500 5,000 45,000 80,000 4,000 Liabilities Cash Capital stock
40.
21,500 55,000 59,000
Topic: Step acquisition LO 5 Plunk Corporation currently holds an 80% interest in Spelt Industries and reports the noncontrolling interest in Spelt at $4,000,000 in the equity section of its balance sheet. Plunk pays $5,000,000 in cash to acquire the remaining 20% interest in Spelt. Required Prepare Plunk’s journal entry to record acquisition of the noncontrolling interest in Spelt. ANS: Noncontrolling interest (equity) Shareholders’ equity (APIC)
4,000,000 1,000,000 Cash
41.
5,000,000
Topic: Step acquisition LO 5 Paxata Corporation holds a 35% interest in SCP Company’s stock, reported at $8,000,000 using the equity method. The fair value of the investment is $12,000,000. It acquires the remaining 65% of SCP’s stock for $25,000,000 in cash. At that date, STP’s tangible assets have a fair value of $5,000,000, its identifiable intangible assets have a fair value of $16,000,000, and its liabilities have a fair value of $12,000,000. The acquisition is accounted for as a merger. Required Prepare Paxata’s journal entry or entries to record acquisition of the remaining interest in SCP. ANS: Tangible assets Identifiable intangible assets Goodwill
5,000,000 16,000,000 28,000,000 Liabilities Cash Investment in SCP Gain on investment (income)
Test Bank, Chapter 2
12,000,000 25,000,000 8,000,000 4,000,000
© Cambridge Business Publishers, 2023 2-67
42.
Topic: Step acquisition LO 5 Adele Inc. has a significant interest equity investment in Algo Company, reported using the equity method. Adele acquires the remaining stock of Algo and records the transaction as a merger. Information on this transaction is as follows (in millions): Cash consideration paid Fair value of equity method investment Gain on revaluation of equity method investment Fair value of identifiable intangible assets acquired Goodwill recognized
$100 55 30 40 120
Required: a. What was the book value of Adele’s investment in Algo, immediately prior to its revaluation for the acquisition? b. What was the fair value of tangible net assets (liabilities) acquired? c. Prepare the journal entry or entries Adele makes to record the transaction. ANS (in millions): a. $55 - $30 = $25 b. $100 + $55 - $40 - $120 = $(5) c. Identifiable intangible assets Goodwill
40 120 Tangible net assets Cash Investment in Algo Gain on investment (income)
43.
5 100 25 30
Topic: Step acquisition with earnout, changes in estimated valuations LO 2, 3, 5 Cougar Company holds a 40% interest in Puma Company, reported using the equity method and currently carried at $150 million on Cougar’s books. Cougar acquires the remaining 60% of Puma for $900 million in cash. In addition, Cougar will pay the former owners of Puma additional cash in the future if certain financial milestones are reached. The earnout has a current value of $200 million. Puma has $250 million in previously unreported trademarks. Cougar reports a $800 million gain on its investment in Puma, and goodwill of $600 million. Required a. Assume that acquisition cost attributed to net assets other than trademarks and goodwill is allocated to tangible net assets. Prepare the journal entry Cougar makes to record the business combination. b. By the end of the year, the earnout increases in value by $25 million due to postcombination events. Prepare the journal entry to record this information. c. Assume that in the following year, Cougar settles the earnout by paying $175 million to Puma’s former owners. Prepare the journal entry to record this transaction.
© Cambridge Business Publishers, 2023 2-68
Advanced Accounting, 5th Edition
ANS (in millions): a. Trademarks Goodwill Tangible net assets
250 600 1,200 Investment in Puma Gain on investment (income) Cash Earnout liability
150 800 900 200
b. Loss on earnout (income)
25 Earnout liability
25
c. Earnout liability
225 Cash Gain on earnout (income)
44.
175 50
Topic: Business combination versus asset acquisition LO 6 Hampton Corporation pays $4,000 in cash to acquire the following group of assets from Johnson Company:
Equipment Developed technology Favorable leases
Fair value $ 700 1,400 1,400
None of the acquired assets is nonqualifying. Required a. Prepare the journal entry Hampton makes to record the transaction as acquisition of a business. b. Prepare the journal entry Hampton makes to record the transaction as an asset acquisition. ANS: a. Equipment Developed technology Favorable leases Goodwill
700 1,400 1,400 500 Cash
4,000
b. Equipment Developed technology Favorable leases
800 1,600 1,600 Cash
Test Bank, Chapter 2
4,000 © Cambridge Business Publishers, 2023 2-69
45.
Topic: Asset acquisition LO 6 Iona Company purchases equipment with a fair value of $40 million and technology with a fair value of $10 million from Jackson Company, at a total cost of $54 million in cash. Iona also agrees to pay Jackson future additional consideration with a current value of $2 million, if certain financial performance conditions are met. Legal fees for the transaction are $1 million, paid in cash. Required Prepare Iona’s journal entry to record this transaction, assuming it does not qualify as an acquisition of a business. ANS (in millions): Equipment Technology
44 11 Cash
© Cambridge Business Publishers, 2023 2-70
55
Advanced Accounting, 5th Edition
TEST BANK CHAPTER 3 Consolidated Financial Statements: Date of Acquisition MULTIPLE CHOICE 1.
2.
3.
4.
Topic: Motivations behind consolidation LO 1 What is the most likely reason why a company may take steps to avoid consolidating another company? a. b. c. d.
Consolidation reduces total assets. Consolidation increases leverage. Consolidation is confusing, since the other company’s account balances are hard to find. Consolidation requires the parent company to maintain the subsidiary’s books.
ANS:
b
Topic: Motivations behind consolidation LO 1 What is the purpose of consolidated financial statements, per the FASB Codification? a. b. c. d.
Present financial statements that put the parent company in the best light. Highlight the separate performance of the subsidiary. Represent the results of activities under the control of the parent. Represent the results of activities under the control of the subsidiary.
ANS:
c
Topic: Consolidation principles LO 1 A key concept in determining whether to consolidate an investee is: a. b. c. d.
The percentage ownership of the investee’s voting stock Whether or not the investee carries a significant amount of debt owed to the investor Whether or not the assets and liabilities of the investee are reported at fair value Whether the investor has the power to direct the activities of the investee
ANS:
d
Topic: Consolidation principles LO 1 U.S. GAAP criteria for consolidation are found in: a. b. c. d.
ASC Topic 805 ASC Topic 810 ASC Topic 825 ASC Topic 350
ANS:
b
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-1
5.
6.
7.
Topic: Motivations behind consolidation, consolidation of variable interest entities LO 1 While a company can create a special purpose entity for sound business reasons, it can also make its financial statements look better by creating an entity and then not consolidating the entity, primarily because if they don’t consolidate, a. b. c. d.
Expenses are under-reported Debt is under-reported Debt is over-reported Assets are under-reported
ANS:
b
Topic: Motivations in consolidation LO 1 GM forms a separate legal entity, funded mostly by debt. The entity acquires a building and leases it to GM. If GM does not consolidate the entity, how does this reporting choice affect GM’s financial statements, as compared with consolidating the entity? a. b. c. d.
GM’s operating expenses are overstated. GM’s retained earnings balance is overstated. GM’s capital stock is understated. GM’s assets are understated.
ANS:
d
Topic: Consolidation of equity investments LO 2 General Motors owns 50% of the voting stock of two companies in China. General Motors most likely a. b. c. d. ANS:
Consolidates the entities because General Motors controls their decisions. Reports the investments using the equity method, because General Motors owns between 20% and 50% of the entities’ voting stock. Consolidates the entities because General Motors is their largest customer. Reports the investments as investments without significant influence, because General Motors owns less than a majority of their voting stock. b
© Cambridge Business Publishers, 2023 3-2
Advanced Accounting, 5th Edition
8.
9.
10.
Topic: Consolidation of equity investments LO 2 Prival Company acquires 49.99% of the voting stock of Schaffer Company. From the viewpoint of readers of the financial statements, the most important factor Prival should consider when deciding whether to consolidate Schaffer in its financial statements is: a. b. c. d.
Prival’s percentage ownership of Schaffer’s stock Whether consolidation will make it harder for Prival to borrow money Whether Prival follows IFRS or U.S. GAAP Whether Prival controls the performance of Schaffer
ANS:
d
Topic: Consolidation of equity investments LO 2 Following U.S. GAAP, a company consolidates its majority-owned subsidiary unless: a. b. c. d.
The subsidiary is a financial institution. The minority shareholders have significant veto rights over the majority shareholders. The subsidiary is substantially smaller than its parent company. The subsidiary is highly leveraged.
ANS:
b
Topic: Consolidation of equity investments LO 2 Following U.S. GAAP, if a company owns over 50% of the voting stock of another company: a. b. c.
11.
d.
It is required to consolidate the company. It consolidates the company unless the stock ownership does not result in control. It treats the investment as an equity method investment unless it is a joint venture, which is consolidated. It consolidates the company unless it is a special purpose entity.
ANS:
b
Topic: Consolidation of equity investments LO 2 Petron, a U.S. company, owns the majority of the voting stock of Sego. Petron consolidates Sego unless: a. b. c. d.
Sego is in an underdeveloped country. Sego deals with products or services that are not Petron’s primary focus. Sego is bankrupt. The shares of Sego that are not owned by Petron are owned by one investor.
ANS:
c
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-3
12.
13.
Topic: Consolidation of equity investments LO 2 Preston Company, a U.S. auto part manufacturer, owns the majority of the voting stock of SEO Bearings Company, located in China. Preston uses the equity method to report its investment in SEO Bearings. Which situation justifies this reporting choice? a. b. c. d.
SEO is controlled by the Chinese government. SEO is located in China. SEO’s board of directors includes representation from other entities. SEO’s decisions are the responsibility of SEO’s CEO.
ANS:
a
Topic: Consolidation principles LO 2 When assessing whether you control another entity, it is important to consider “kick-out rights” because although it appears that you control the entity’s decisions, a. b. c.
14.
15.
d.
You may only own rights to voting shares, rather than the shares themselves. You may be acting as an agent for the real decision makers. You may not make the types of decisions that significantly affect the overall entity’s performance. You may own the entity’s convertible instruments, rather than its voting shares.
ANS:
b
Topic: Special purpose entities LO 3 A U.S. financial services company sets up a special purpose entity to buy accounts receivable from its clients. The SPE’s stock is held by outside investors. The financial services company should not consolidate the assets and liabilities of the SPE if: a. b. c. d.
The SPE is not a variable interest entity. Holders of the SPE’s stock are also clients of the financial services company. The SPE’s total equity is more than 50% of the SPE’s total assets. The financial services company guarantees the SPE’s debt.
ANS:
a
Topic: Variable interest entities LO 3 Acme, a U.S. company, has a financial relationship with Zeta, but does not own any of its voting stock. When should Acme consolidate Zeta’s accounts in its annual report, following U.S. GAAP? a. b. c. d.
Never Zeta is a variable interest entity. Zeta is a variable interest entity and Acme is its primary beneficiary. Acme controls Zeta’s operations.
ANS:
c
© Cambridge Business Publishers, 2023 3-4
Advanced Accounting, 5th Edition
16.
Topic: Variable interest entities LO 3 Persuasive qualitative evidence that an entity is not a variable interest entity, per U.S. GAAP, includes which one of the following? a.
d.
The entity is the sole supplier to another entity, and its profit margin is comparable to its competitors. The entity has issued preferred and common stock, and the shareholders are guaranteed a certain return on their investment. The entity’s equity level is greater than that of similar entities that do not require their debt to be guaranteed by another party. The entity has a debt to equity ratio that is higher than that of its competitors.
ANS:
c
b. c.
17.
18.
19.
Topic: Variable interest entities LO 3 Persuasive qualitative evidence that an entity is not a variable interest entity, per U.S. GAAP, includes which one of the following? a. b. c. d.
The entity’s business is not focused on just a few customers. The entity’s shareholders are guaranteed a certain return on their investment. The entity can borrow based on its own creditworthiness. The entity has never issued equity shares with no voting interests.
ANS:
c
Topic: Variable interest entities LO 3 TuffCo has a financial relationship with Umber but does not own any of its stock. If Umber does not qualify as a variable interest entity, TuffCo will likely a. b. c. d.
report its investment in Umber using the equity method. report its investment in Umber at fair value through income. consolidate Umber. not report its investment in Umber.
ANS:
d
Topic: Variable interest entities LO 3 ABC has a financial relationship with XYZ and must include XYZ’s assets and liabilities on its balance sheet. If ABC and XYZ were already under common control at the date ABC identifies XYZ as meeting the requirements for consolidation, XYZ’s consolidated balance sheet reports a noncontrolling interest valued at a. b. c. d.
the VIE’s book value. the VIE’s market value. zero. the fair value of the VIE’s identifiable net assets.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-5
ANS: 20.
21.
22.
a
Topic: Variable interest entities LO 3 ABC has a financial relationship with XYZ and must include XYZ’s assets and liabilities on its balance sheet. If ABC and XYZ were not previously under common control at the date ABC identifies XYZ as meeting the requirements for consolidation, XYZ’s consolidated balance sheet reports a noncontrolling interest valued at a. b. c. d.
the VIE’s book value. the VIE’s market value. zero. the fair value of the VIE’s identifiable net assets.
ANS:
b
Topic: Variable interest entities LO 3 Peters Inc. consolidates a variable interest entity even though it owns none of the entity’s equity. The difference between the VIE’s assets and liabilities is reported on Peters’ balance sheet: a. b. c. d.
In equity, as “noncontrolling interest” In equity, as an increase in retained earnings As a noncurrent liability As a contra to the investment account reported in Peters’ assets
ANS:
a
Topic: Variable interest entities LO 3 A company decides it is required to consolidate a special interest entity. The assets and liabilities of that entity are consolidated at book value, and not revalued to fair value, when a. b. c. d.
The company owns some of the stock of the entity. The company and the entity are already under common control. The company becomes the primary beneficiary of the entity. The entity is not previously under the control of the company.
ANS:
b
© Cambridge Business Publishers, 2023 3-6
Advanced Accounting, 5th Edition
23.
Topic: Variable interest entities LO 3 Tyvo is a legal entity that securitizes receivables for a variety of financial institutions. It was formed with an investment of $100 million. Qualitative analysis is inconclusive regarding whether Tyvo is a variable interest entity. Quantitative analysis indicates that Tyvo’s expected future cash flows are as follows, in millions (assume all cash flows occur at the end of the first year): Expected Cash Flows Probability $ 84 0.40 144 0.60 A risk-adjusted discount rate of 20% is appropriate. Tyvo is likely to be considered a variable interest entity, per U.S. GAAP, if its equity financing is less than what amount? a. b. c. d.
$100 million $25 million $10 million $12 million
ANS:
d The present value of expected losses is $12 million, as calculated below: (in millions) Cash Present Flows Value $ 84 $ 70 144 120
Test Bank, Chapter 3
Prob 0.40 0.60
E(PV) $ 28 72 $100
Investment $100 100
Resid. Returns $ (30) 20
E(G) $12 $12
E(L) $(12) ___ $(12)
© Cambridge Business Publishers, 2023 3-7
24.
Topic: Variable interest entities LO 3 Ulon is a legal entity that provides leasing services. It was formed with an investment of $75 million, of which $65 million was financed by debt, and the remainder was provided by outside equity interests. Qualitative analysis is inconclusive in determining whether Ulon is a variable interest entity. Quantitative analysis indicates that Ulon’s expected future cash flows are as follows, in millions (assume a one-year time frame, with cash flows occurring at the end of the year): Expected Cash Flows Probability $108 0.50 72 0.50 A risk-adjusted discount rate of 20% is appropriate. Is Ulon likely to be a variable interest entity, per U.S. GAAP? a. b. c. d.
No, because the equity interest is more than 10% of total financing. Yes, because the equity interest is less than expected losses of $15 million. No, because the equity interest is more than expected losses of $7.5 million. Yes, because the equity interest is more than 10% of total assets.
ANS:
c The present value of expected losses is $7.5 million, as calculated below. The equity interest is $75 - $65 = $10 million. (in millions) Cash Present Flows Value $108 $90 72 60
25.
Prob. 0.50 0.50
E(PV) $45 30 $75
Resid. Returns $ 15 (15)
Investment $75 75
E(G) $ 7.50 $ 7.50
E(L) $(7.50) $(7.50)
Topic: Different accounting years LO 4 If a subsidiary has a different accounting year-end than its parent, a. b. c. d.
The subsidiary must change its accounting year to match that of the parent. The parent must change its accounting year to match that of the subsidiary. The subsidiary’s year-end can differ from that of the parent, up to three months. The subsidiary’s year-end can differ from that of the parent, up to six months.
ANS:
c
© Cambridge Business Publishers, 2023 3-8
Advanced Accounting, 5th Edition
26.
27.
Topic: Different accounting principles LO 4 A parent company uses IFRS and has a subsidiary whose books are maintained following U.S. GAAP. The consolidated financial statements of the parent include the subsidiary’s accounts, reported using: a. b. c. d.
IFRS U.S. GAAP Either IFRS or U.S. GAAP, since both are acceptable A combination of IFRS and U.S. GAAP, depending on the account
ANS:
a
Topic: Different currencies LO 4 A U.S. parent consolidates its U.K. subsidiary. The U.K. subsidiary’s accounts are measured in pounds sterling. The subsidiary’s accounts are included in the consolidated financial statements a. b. c. d. ANS:
28.
29.
in U.S. dollars. in pounds. in pounds for monetary assets and liabilities, and in U.S. dollars for nonmonetary assets and liabilities. in pounds for accounts valued at fair value, and in U.S. dollars for accounts valued at cost or amortized cost. a
Topic: Different accounting principles and currencies LO 4 A parent company uses U.S. GAAP and presents its financial statements in U.S. dollars. It has a subsidiary in Singapore whose books are maintained in Singapore dollars, following IFRS. The subsidiary’s accounts are included in the consolidated financial statements of the parent: a. b. c. d.
in Singapore dollars, following IFRS. in Singapore dollars, following U.S. GAAP. in U.S. dollars, following IFRS. in U.S. dollars, following U.S. GAAP.
ANS:
d
Topic: Consolidation objectives LO 4 The consolidated balance sheet of a parent and subsidiary reports account balances as if the parent accounted for its investment in the subsidiary as a: a. b. c. d.
Significant influence investment. Investment with no influence. Merger. Variable interest entity.
ANS:
c
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-9
30.
Topic: Consolidation eliminating entries LO 4 When consolidating the balance sheets of a parent and its subsidiary at the date of acquisition, the overall effect of consolidation eliminating entries is to: a. b. c. d. ANS:
31.
32.
33.
Remove the parent’s investment account and the subsidiary’s equity accounts. Remove the parent’s investment account, the subsidiary’s capital stock accounts, and adjust the subsidiary’s assets and liabilities to fair value at the date of acquisition. Remove the the parent’s investment account and the subsidiary’s equity accounts and adjust the subsidiary’s assets and liabilities to fair value at the date of acquisition. Remove the subsidiary’s equity accounts and adjust the subsidiary’s assets and liabilities to fair value at the date of acquisition. c
Topic: Consolidated balance sheet LO 4 Which account balance is always reported at the same amount on the parent’s balance sheet and on the consolidated balance sheet of the parent and its subsidiary at the date of acquisition? a. b. c. d.
Inventories Goodwill Accumulated other comprehensive income Identifiable intangible assets
ANS:
c
Topic: Consolidated balance sheet LO 4 Which one of the following accounts, appearing on the books of an acquired company, will not appear on a consolidated balance sheet at the date of acquisition? a. b. c. d.
Retained earnings Trademarks Investments in equity securities Investments in HTM debt securities
ANS:
a
Topic: Consolidated balance sheet LO 4 Which one of the following balances appears on a consolidated balance sheet at the date of acquisition? a. b. c. d.
Gain on sale of investments, reported on the subsidiary’s books Dividends, reported on the parent’s books Identifiable intangible assets, reported on the parent’s books Accumulated other comprehensive income, reported on the subsidiary’s books
© Cambridge Business Publishers, 2023 3-10
Advanced Accounting, 5th Edition
ANS: 34.
c
Topic: Consolidated balance sheet, bargain purchase LO 4 A parent acquires all of the stock of a subsidiary for $50 million in cash. The fair value of the subsidiary’s identifiable net assets is $55 million. On its own books, the parent reports a. b. c. d.
a gain of $5 million in income. a gain of $5 million in other comprehensive income. its investment at a balance of $50 million. its investment at a balance of $55 million, with a contra asset allowance of $5 million.
ANS:
a The parent’s entry to record the acquisition on its own books is (in millions): Investment in subsidiary 55 Cash Bargain gain (income)
50 5
Use the following information to answer questions 35 and 36 below. A parent acquires all of the stock of a subsidiary for $40 million in cash. The subsidiary’s books report the following account balances at the date of acquisition (in trial balance format). Date-of-acquisition fair values are also displayed. (in millions) Current assets Noncurrent assets Liabilities Capital stock Retained earnings Accumulated other comprehensive loss Total 35.
Book value Dr (Cr) $ 5 45 (40) (8) (3) 1 $ 0
Fair value Dr (Cr) $ 6 38 (42)
Topic: Consolidation eliminating entries LO 4 On the consolidation working paper, eliminating entry (E) debits a. b. c. d.
accumulated other comprehensive loss by $1 million. retained earnings by $3 million. investment in subsidiary by $10 million. liabilities by $2 million.
ANS:
b (E) Capital stock Retained earnings
8 3 AOCL Investment in subsidiary
Test Bank, Chapter 3
1 10
© Cambridge Business Publishers, 2023 3-11
36.
Topic: Consolidation eliminating entries LO 4 On the consolidation working paper, eliminating entry (R) credits a. b. c. d.
current assets by $1 million. liabilities by $2 million. investment in subsidiary by $10 million. goodwill by $35 million.
ANS:
b (R) Current assets Goodwill
1 38 Noncurrent assets Liabilities Investment in subsidiary
7 2 30
Use the following information to answer questions 37 and 38 below. A parent acquires all of the stock of a subsidiary for $65 million in cash. The subsidiary’s books report the following account balances at the date of acquisition (in trial balance format). Date-of-acquisition fair values are also displayed. (in millions) Current assets Noncurrent assets Liabilities Capital stock Retained deficit Accumulated other comprehensive income Total 37.
Book value Dr (Cr) $ 15 100 (127) (5) 20 (3) $ 0
Fair value Dr (Cr) $ 10 80 (127)
Topic: Consolidation eliminating entries LO 4 On the consolidation working paper, eliminating entry (E) debits a. b. c. d.
current assets by $5 million. retained deficit by $20 million. investment in subsidiary by $12 million. noncurrent assets by $20 million.
ANS:
c (E) Capital stock AOCI Investment in subsidiary
5 3 12 Retained deficit
© Cambridge Business Publishers, 2023 3-12
20
Advanced Accounting, 5th Edition
38.
Topic: Consolidation eliminating entries LO 4 On the consolidation working paper, eliminating entry (R) debits a. b. c. d.
current assets by $5 million. noncurrent assets by $20 million. investment in subsidiary by $10 million. goodwill by $102 million.
ANS:
d (R) Goodwill
102 Current assets Noncurrent assets Investment in subsidiary
39.
Topic: Consolidation eliminating entries LO 4 GMI acquires all of the voting stock of ELI for an acquisition cost that is $4 million above the book value of ELI’s net assets. At the date of acquisition, ELI’s equipment was overvalued by $2 million and its reported intangible assets were undervalued by $6 million. Consolidation eliminating entry R, at the date of acquisition, includes a(n): a. b. c. d.
$2 million debit to equipment $8 million credit to the investment account $4 million debit to goodwill $6 million debit to intangible assets
ANS:
d Eliminating entry (R) is: Identifiable intangibles
6,000,000 Investment in ELI Equipment
40.
5 20 77
4,000,000 2,000,000
Topic: Consolidation eliminating entries LO 4 Palm Corporation acquired all the stock of Sequoia Company, at an acquisition cost that was $6,000,000 in excess of Sequoia’s $2,000,000 book value. All of Sequoia's assets and liabilities are carried at amounts approximating fair value, except that land is overvalued by $500,000. Which of the following is false concerning the consolidation eliminating entries at the date of acquisition? a. b. c. d.
Eliminating entry (E) reduces the investment by $2,000,000. Eliminating entry (R) reduces land by $500,000. Eliminating entry (R) reduces the investment by $4,000,000 Eliminating entry (R) increases goodwill by $6,500,000
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-13
ANS:
c Eliminating entries are: (E) Equity-Sequoia
2,000,000 Investment in Sequoia
(R) Goodwill
2,000,000
6,500,000 Land Investment in Sequoia
41.
500,000 6,000,000
Topic: Consolidation eliminating entries, previously unreported intangible assets LO 4 Pringle Corporation acquired all the stock of Sunny Company, at an acquisition cost of $30 million. Sunny’s book value at the time was $10 million. Sunny’s current assets and all liabilities were carried at amounts approximating fair value. However, its plant assets were overvalued by $6 million. Sunny also has previously unreported developed technology valued at $4 million. Which of the following is false concerning the consolidation eliminating entries at the date of acquisition? a. b. c. d.
Eliminating entry (E) reduces the investment by $10 million. Eliminating entry (R) increases goodwill by $12 million. Eliminating entry (R) increases identifiable intangible assets by $4 million. Eliminating entry (E) reduces Sunny’s shareholders’ equity by $10 million.
ANS:
b Eliminating entries are: (E) Equity-Sunny
10,000,000 Investment in Sunny
(R) Goodwill Identifiable intangible assets
22,000,000 4,000,000 Investment in Sunny Plant assets
© Cambridge Business Publishers, 2023 3-14
10,000,000
20,000,000 6,000,000
Advanced Accounting, 5th Edition
42.
Topic: Acquisition entry, consolidation eliminating entries, bargain purchase LO 4 PMC Corporation acquired all of the stock of SVB Company, at an acquisition cost of $12 million in cash. SVB’s book value at the time was $9 million. SVB’s net assets are reported at amounts approximating market value at the date of acquisition. However, it has previously unreported brand names and favorable lease agreements, valued at a total of $5 million. Which of the following is true concerning consolidation of PMC and SVB at the date of acquisition? a. b. c. d.
Eliminating entry (E) reduces the investment by $12 million. Eliminating entry (E) reduces the subsidiary’s equity by $14 million. Eliminating entry (R) creates a bargain gain of $2 million. Eliminating entry (R) reduces the investment by $5 million.
ANS:
d PMC’s entry to record the acquisition is: Investment in SVB
14,000,000 Cash Gain on acquisition
Eliminating entries are: (E) Equity-SVB
12,000,000 2,000,000
9,000,000 Investment in SVB
(R) Identifiable intangible assets
9,000,000
5,000,000 Investment in SVB
43.
5,000,000
Topic: Consolidation eliminating entries, goodwill previously reported by subsidiary LO 4 Power Inc. acquires all the voting stock of Signal Company for $30,000,000 in cash. At the date of acquisition, Signal’s balance sheet is as follows:
Tangible assets Goodwill Liabilities Equity
Book Value Dr (Cr) $15,000,000 5,000,000 (12,000,000) (8,000,000)
Fair Value Dr (Cr) $14,000,000 7,000,000 (12,000,000)
What amount of consolidated goodwill is recognized for this acquisition in eliminating entry (R) at the date of acquisition? a. b. c. d.
$7,000,000 $12,000,000 $23,000,000 $28,000,000
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-15
ANS:
d Eliminating entries are: (E) Equity – Signal
8,000,000 Investment in Signal
(R) Goodwill (new)
8,000,000
28,000,000 Investment in Signal Tangible assets Goodwill (old)
22,000,000 1,000,000 5,000,000
Use the following information to answer Questions 44 - 48. Precision Company acquires all of Springfield Company’s voting stock for $4,000,000 in cash. Information on Springfield's assets and liabilities at the date of acquisition is as follows:
Current assets Land, buildings and equipment (net) Liabilities Capital stock Retained earnings
Book Value Dr (Cr) $ 500,000 2,000,000 (600,000) (700,000) (1,200,000)
Fair Value Dr (Cr) $ 400,000 1,800,000 (610,000)
In addition, Springfield Company has unrecorded identifiable intangible assets, in the form of brand names and lease agreements, with a total estimated fair value of $500,000. 44.
45.
Topic: Consolidation working paper LO 4 In eliminating entry (R) on the consolidation working paper, the credit to investment is: a. b. c. d.
$1,900,000 $2,100,000 $2,600,000 $4,000,000
ANS:
b
Topic: Consolidation working paper LO 4 In eliminating entry (R) on the consolidation working paper, the debit to goodwill is: a. b. c. d.
$ 670,000 $3,190,000 $1,910,000 $0
ANS:
c
© Cambridge Business Publishers, 2023 3-16
Advanced Accounting, 5th Edition
46.
Topic: Consolidation working paper LO 4 In eliminating entry (R) on the consolidation working paper, the debit to identifiable intangibles is: a. b. c. d.
$0 $200,000 $490,000 $500,000
ANS:
d
Calculations for Questions 44 – 46: Eliminating entries are: (E) Capital stock Retained earnings
700,000 1,200,000 Investment in Springfield
1,900,000
(R) Identifiable intangibles Goodwill
500,000 1,910,000 Investment in Springfield Current assets Land, buildings and equipment Liabilities
47.
48.
2,100,000 100,000 200,000 10,000
Topic: Consolidation working paper, pushdown accounting LO 4 Now assume Springfield uses pushdown accounting at the date of acquisition. What amount does it credit to its Pushdown Capital account on its own books? a. b. c. d.
$3,300,000 $2,100,000 $1,510,000 $0
ANS:
a
Topic: Consolidation working paper, pushdown accounting LO 4 Assuming Springfield uses pushdown accounting at the date of acquisition, eliminating entry (E) includes a a. b. c. d.
Debit to retained earnings of $1,200,000. Debit to pushdown capital of $2,100,000. Credit to investment in Springfield of $4,000,000. Debit to land, buildings and equipment of $200,000.
ANS:
c
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-17
Calculations for Questions 47 and 48: Springfield makes the following entry on its own books: Retained earnings Identifiable intangibles Goodwill
1,200,000 500,000 1,910,000 Current assets Land, buildings and equipment Liabilities Pushdown capital
Eliminating entry (E) is: (E) Capital stock Pushdown capital
100,000 200,000 10,000 3,300,000
700,000 3,300,000 Investment in Springfield
4,000,000
Eliminating entry (R) is not necessary. Use the following information to answer Questions 49 - 52. DataCloud purchased all of the shares of Supercore for $30 million in cash. The balance sheets of DataCloud and Supercore just after the acquisition appear below, along with fair value information for Supercore’s net assets. DataCloud Book Value Current assets Plant assets Identifiable intangible assets Investment in Supercore Liabilities Capital stock Retained earnings Treasury stock Accumulated other comprehensive loss Total 49.
$ 10,000,000 40,000,000 -30,000,000 (35,000,000) (30,000,000) (15,600,000) 100,000 500,000 $ 0
Supercore Book Value Fair Value Dr (Cr) $ 5,000,000 $ 4,000,000 36,000,000 25,000,000 -10,000,000 --(37,800,000) (37,500,000) (5,000,000) 1,500,000 100,000 200,000 $ 0
Topic: Consolidated balance sheet LO 4 On the consolidated balance sheet at the date of acquisition, what is the balance for retained earnings? a. b. c. d.
$14,100,000 $17,100,000 $15,600,000 $0
© Cambridge Business Publishers, 2023 3-18
Advanced Accounting, 5th Edition
ANS: 50.
51.
52.
c
Topic: Consolidated balance sheet LO 4 On the consolidated balance sheet at the date of acquisition, what is the balance for goodwill? a. b. c. d.
$25,100,000 $28,500,000 $29,100,000 $24,900,000
ANS:
b
Topic: Consolidated balance sheet LO 4 On the consolidated balance sheet on the date of acquisition, what is the balance for plant assets? a. b. c. d.
$76,000,000 $87,000,000 $40,000,000 $65,000,000
ANS:
d
Topic: Consolidated balance sheet LO 4 On the consolidated balance sheet on the date of acquisition, what is the balance for accumulated other comprehensive loss? a. b. c. d.
$700,000 debit $300,000 debit $500,000 debit $300,000 credit
ANS:
c
Worksheet for Questions 49 - 52:
Current assets Plant assets Identifiable intangibles Investment in Supercore
DataCloud Dr (Cr) $ 10,000,000 40,000,000 -30,000,000
Supercore Dr (Cr) $ 5,000,000 36,000,000 ---
Goodwill Liabilities Capital stock Retained earnings Treasury stock AOCL Total
-(35,000,000) (30,000,000) (15,600,000) 100,000 500,000 $ 0
-(37,800,000) (5,000,000) 1,500,000 100,000 200,000 $ 0
Test Bank, Chapter 3
Dr
Cr 1,000,000 (R) 11,000,000 (R)
(R) 10,000,000 3,200,000 (E) 26,800,000 (R) (R) 28,500,000 (R) 300,000 (E) 5,000,000
________ $43,800,000
1,500,000 (E) 100,000 (E) 200,000 (E) $43,800,000
Consolidated Dr (Cr) $ 14,000,000 65,000,000 10,000,000 -28,500,000 (72,500,000) (30,000,000) (15,600,000) 100,000 500,000 $ 0
© Cambridge Business Publishers, 2023 3-19
Use the following information to answer Questions 53 - 55: Pilgrim Corporation acquires all of the stock of Sonic Company for $6,000,000 in cash. Sonic's net assets had a book value of $3,000,000 at the date of acquisition. The book values of Sonic's assets and liabilities approximated fair values, except that Sonic reported plant assets at $4,950,000 more than fair value. In addition, Sonic had unrecorded identifiable intangible assets with an estimated fair value of $8,000,000, appropriately capitalized according to GAAP. 53.
54.
55.
Topic: Consolidation working paper, bargain purchase LO 4 When recording its investment in Sonic, Pilgrim reports a gain on acquisition in the amount of: a. b. c. d.
$0 $ 500,000 $ 50,000 $3,000,000
ANS:
c
Topic: Consolidation working paper, bargain purchase LO 4 Consolidation working paper eliminating entry (R) at the date of acquisition includes a credit to Investment in Sonic in the amount of: a. b. c. d.
$3,050,000 $6,050,000 $3,000,000 $3,950,000
ANS:
a
Topic: Consolidation working paper, bargain purchase LO 4 Consolidation working paper eliminating entry (E) at the date of acquisition includes a debit to Sonic’s shareholders’ equity in the amount of: a. b. c. d.
$3,000,000 $0 $4,950,000 $3,050,000
ANS:
a
© Cambridge Business Publishers, 2023 3-20
Advanced Accounting, 5th Edition
Calculations for Questions 53 - 55: The fair value of Sonic’s identifiable net assets = $3,000,000 – $4,950,000 + $8,000,000 = $6,050,000. Pilgrim’s entry to record the acquisition is: Investment in Sonic
6,050,000 Cash Gain on acquisition
6,000,000 50,000
Eliminating entries are: (E) Shareholders’ equity-Sonic
3,000,000 Investment in Sonic
(R) Identifiable intangibles
3,000,000
8,000,000 Investment in Sonic Plant assets
3,050,000 4,950,000
Use the following information to answer Questions 56 – 58. PVN Corporation acquired all of the stock of SFC Corporation by issuing 1,000,000 shares of no-par stock with a market value of $40 per share. Registration fees were $500,000 and legal fees were $300,000, all paid in cash. SFC’s book value at the date of acquisition was $8,000,000. At the date of acquisition, all of SFC’s assets and liabilities were reported at amounts approximating fair value, except that its plant and equipment was overvalued by $10,000,000. SFC also had unreported identifiable intangible assets valued at $15,000,000, and unreported warranty liabilities of $4,000,000. A deferred tax liability valued at $2 million was reported in consolidation at the date of acquisition. 56.
Topic: Consolidation working paper, registration and out-of-pocket costs, preacquisition contingency, deferred taxes LO 4 Eliminating entry (R) reduces Investment in SFC by: a. b. c. d.
$32,800,000 $32,300,000 $32,000,000 $40,000,000
ANS:
c
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-21
57.
58.
Topic: Consolidation working paper, registration and out-of-pocket costs, preacquisition contingency, deferred taxes LO 4 Eliminating entry (R) debits goodwill for: a. b. c. d.
$29,300,000 $41,000,000 $21,000,000 $33,000,000
ANS:
d
Topic: Consolidation working paper, registration and out-of-pocket costs, preacquisition contingency, deferred taxes LO 4 Eliminating entry (E) reduces Investment in SFC by: a. b. c. d.
$8,000,000 $8,300,000 $8,800,000 $40,300,000
ANS:
a
Calculations for Questions 56 – 58: PVN’s acquisition entry is: Investment in SFC Merger expenses
40,000,000 300,000 Capital stock Cash
39,500,000 800,000
Eliminating entries are: (E) Shareholders’ equity-SFC
8,000,000 Investment in SFC
(R) Identifiable intangibles Goodwill
15,000,000 33,000,000 Plant and equipment Warranty liabilities Investment in SFC Deferred tax liability
© Cambridge Business Publishers, 2023 3-22
8,000,000
10,000,000 4,000,000 32,000,000 2,000,000
Advanced Accounting, 5th Edition
Use the following information to answer Questions 59 – 63: Pacific Inc. acquires all of the voting stock of Skye Company for $360 in cash. Skye’s balance sheet at the date of acquisition is as follows:
Assets Current assets Land, buildings & equipment, net
Total assets
Skye Company Liabilities & equity $ 75 Current liabilities 1,580 Long-term liabilities Capital stock Retained earnings Accumulated other comprehensive loss _____ Treasury stock $1,655 Total liabilities & equity
$ 80 1,500 100 5 (10) (20) $1,655
Skye’s land, buildings & equipment have a fair value of $1,000. Skye’s other assets and liabilities are reported at amounts that approximate fair value. Skye has unreported identifiable intangibles with a fair value of $350 that meet the criteria for capitalization. 59.
60.
Topic: Consolidation eliminating entries LO 4 On the date of acquisition consolidation working paper, what is the effect of eliminating entry (E) on Investment in Skye? a. b. c. d.
Credit of $75 Credit of $95 Debit of $30 Credit of $85
ANS:
a
Topic: Consolidation eliminating entries LO 4 On the date of acquisition consolidation working paper, what is the effect of eliminating entry (R) on Investment in Skye? a. b. c. d.
Debit of $135 Credit of $135 Debit of $230 Credit of $285
ANS:
d
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-23
61.
Topic: Consolidation eliminating entries LO 4 On the date of acquisition consolidation working paper, eliminating entry (R) includes a debit to goodwill in the amount of: a. b. c. d.
$495 $515 $505 $285
ANS:
b
Calculations for Questions 59 - 61: Eliminating entries are: (E) Capital stock Retained earnings
100 5 AOCL Treasury stock Investment in Skye
(R) Identifiable intangibles Goodwill
350 515 Land, buildings & equipment Investment in Skye
62.
63.
10 20 75
580 285
Topic: Consolidation eliminating entries, pushdown accounting LO 4 Now assume Skye elects to use pushdown accounting at the date of acquisition. What is its credit to Pushdown Capital, on its own books? a. b. c. d.
$305 $285 $275 $280
ANS:
d
Topic: Consolidation eliminating entries, pushdown accounting LO 4 Assuming Skye uses pushdown accounting at the date of acquisition, which statement is true concerning eliminating entry (R) on the consolidation working paper at the date of acquisition? a. b. c. d.
Retained earnings is debited by $5. Capital stock is debited by $100. Investment in Skye is credited by $285. There is no eliminating entry (R).
ANS:
d
© Cambridge Business Publishers, 2023 3-24
Advanced Accounting, 5th Edition
Calculations for Questions 62 and 63: Skye’s pushdown accounting entry is: Identifiable intangibles Retained earnings Goodwill AOCL Land, buildings & equipment Pushdown capital
350 5 515 10 580 280
The eliminating entry is: (E) Capital stock Pushdown capital
100 280 Investment in Skye Treasury stock
360 20
No entry (R) is necessary. Use the following information to answer Questions 64 - 68. PC Company purchased all of the common stock of Silicon Company by issuing 400,000 shares of its $0.10 par value common stock, with a market value of $15/share. PC Company incurred $125,000 in registration and issuing costs, and $75,000 in consulting and legal fees, paid in cash. The book value of Silicon Company at the date of acquisition was as follows: Capital stock Retained deficit Accumulated other comprehensive income Total book value
$ 2,000,000 (2,500,000) 100,000 $ (400,000)
The carrying values of Silicon’s reported assets and liabilities approximated fair value at the date of acquisition, but it has $5,000,000 in developed technology, not reported on its balance sheet but meeting criteria for capitalization per ASC Topic 805. 64.
Topic: Consolidation working paper, registration and out-of-pocket costs LO 4 PC's journal entry to record this acquisition includes a credit to additional paid-in capital for: a. b. c. d.
$5,760,000 $5,835,000 $6,000,000 $5,960,000
ANS:
b
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-25
65.
66.
67.
68.
Topic: Consolidation working paper, registration and out-of-pocket costs LO 4 PC's journal entry to record this acquisition includes a debit to Investment in Silicon for: a. b. c. d.
$5,760,000 $5,835,000 $6,000,000 $5,960,000
ANS:
c
Topic: Consolidation working paper, registration and out-of-pocket costs LO 4 Eliminating entry (E) includes: a. b. c. d.
A debit to retained deficit for $2,500,000 A debit to developed technology for $5,000,000 A credit to accumulated other comprehensive income for $100,000 A debit to Investment in Silicon for $400,000
ANS:
d
Topic: Consolidation working paper, registration and out-of-pocket costs LO 4 Eliminating entry (R) includes a debit to goodwill for: a. b. c. d.
$1,400,000 $1,000,000 $ 400,000 $0
ANS:
a
Topic: Consolidation working paper, registration and out-of-pocket costs LO 4 Eliminating entry (R) includes a credit to Investment in Silicon for: a. b. c. d.
$5,600,000 $6,000,000 $6,400,000 $6,475,000
ANS:
c
© Cambridge Business Publishers, 2023 3-26
Advanced Accounting, 5th Edition
Calculations for Questions 64 – 68: PC’s acquisition entry is: Investment in Silicon Merger expenses
6,000,000 75,000 Common stock (400,000 x $0.10) Additional paid-in capital [(400,000 x $15) – $40,000 - $125,000] Cash ($125,000 + $75,000)
Eliminating entries are: (E) Capital stock AOCI Investment in Silicon
40,000 5,835,000 200,000
2,000,000 100,000 400,000 Retained deficit
2,500,000
(R) Developed technology Goodwill
5,000,000 1,400,000 Investment in Silicon
69.
6,400,000
Topic: Eliminating entries, bargain purchase LO 4 A parent acquires all of the voting stock of a subsidiary. The acquisition cost of $8 million is $1 million less than the fair value of the subsidiary’s identifiable net assets, and $0.8 million less than the subsidiary’s book value. Which statement below is true concerning the consolidation working paper eliminating entries at the date of acquisition? a. b. c. d.
Eliminating entry (R) credits gain on acquisition for $1 million. Eliminating entry (R) debits identifiable net assets for $200,000. Eliminating entry (E) credits Investment in Subsidiary for $8 million. Eliminating entry (R) credits Investment in Subsidiary for $1 million.
ANS:
b The subsidiary book value is $8.8 million, and the gain on acquisition is $1 million. The investment is valued at $9 million, the fair value of the subsidiary’s identifiable net assets, on the parent’s books. Eliminating entries at the date of acquisition are: (E) Equity – subsidiary
8,800,000 Investment in subsidiary
(R) Identifiable net assets
200,000 Investment in subsidiary
Test Bank, Chapter 3
8,800,000
200,000
© Cambridge Business Publishers, 2023 3-27
70.
Topic: Pushdown accounting LO 4 Which statement is true concerning the use of pushdown accounting by a subsidiary? a. b. c. d. ANS:
71.
72.
73.
An acquired company is required to use pushdown accounting. Using pushdown accounting, a subsidiary recognizes unrealized gains and losses on all its assets and liabilities at each balance sheet date. Using pushdown accounting, a subsidiary resets its accumulated other comprehensive income to zero at the date of acquisition. If the subsidiary uses pushdown accounting, no eliminating entries are necessary to consolidate the parent and subsidiary. c
Topic: Pushdown accounting LO 4 If a subsidiary uses pushdown accounting, what is the effect on consolidation eliminating entries at the date of acquisition? a. b. c. d.
No effect It is not necessary to eliminate the subsidiary’s equity accounts. It is not necessary to revalue the subsidiary’s net assets to fair value. An additional entry is required to reverse the pushdown accounting entry.
ANS:
c
Topic: Pushdown accounting LO 4 A company may use pushdown accounting to revalue its assets and liabilities to fair value when a. b. c. d.
The fair values of its assets are significantly different from book value. It gains control of another company through a business acquisition. Its book value is negative. Another company obtains control over it through a business acquisition.
ANS:
d
Topic: Pushdown accounting LO 4 Pivot pays $20,000,000 for all the voting stock of Sand. Sand’s equity accounts consist of capital stock of $2,000,000, retained deficit of $1,500,000, and accumulated other comprehensive income of $100,000. If Sand uses pushdown accounting, it credits Pushdown Capital in the amount of a. b. c. d.
$17,800,000 $17,900,000 $18,000,000 $21,000,000
© Cambridge Business Publishers, 2023 3-28
Advanced Accounting, 5th Edition
ANS:
c Revaluations = $20,000,000 – ($2,000,000 - $1,500,000 + $100,000) = $19,400,000 Sand’s entry is: Revaluations AOCI
19,400,000 100,000 Retained deficit Pushdown capital
1,500,000 18,000,000
Use the following information to answer Questions 74 and 75 Salsa Company’s equity accounts consist of capital stock of $1,500,000 and retained earnings of $400,000. Prance Company pays $9,000,000 for all the voting stock of Salsa Company. The fair value of Salsa’s identifiable net assets is $4,000,000 higher than book value. 74.
75.
Topic: Pushdown accounting LO 4 If Salsa uses pushdown accounting, Salsa’s entry to record the acquisition includes a. b. c. d.
No changes in its equity accounts. A $3,100,000 debit to goodwill. A $1,500,000 debit to capital stock. A $500,000 credit to retained earnings.
ANS:
b
Topic: Pushdown accounting LO 4 If Salsa uses pushdown accounting, what is Salsa’s credit to Pushdown Capital? a. b. c. d.
$7,100,000 $4,400,000 $8,300,000 $7,500,000
ANS:
d
Calculations for Questions 74 and 75: Goodwill = $9,000,000 – ($1,900,000 + $4,000,000) = $3,100,000 Salsa’s entry is: ID net assets Goodwill Retained earnings
4,000,000 3,100,000 400,000 Pushdown capital
Test Bank, Chapter 3
7,500,000
© Cambridge Business Publishers, 2023 3-29
Use the following information to answer questions 76 and 77: Salsa Company’s equity accounts consist of capital stock of $1,500,000 and retained earnings of $400,000. Prance Company pays $9,100,000 for all the voting stock of Salsa Company. The fair value of Salsa’s identifiable net assets is $7,500,000 greater than book value. Salsa uses pushdown accounting to revalue its net assets at the date of acquisition. 76.
77.
Topic: Pushdown accounting, bargain purchase LO 4 Salsa’s entry at the date of acquisition includes a. b. c. d.
A $400,000 debit to retained earnings. A $400,000 credit to retained earnings. A $5,600,000 debit to identifiable net assets. A $5,600,000 debit to goodwill.
ANS:
a
Topic: Pushdown accounting, bargain purchase LO 4 Eliminating entry (E) on the consolidation working paper includes a. b. c. d.
A $400,000 debit to retained earnings. A $400,000 credit to retained earnings. A $7,900,000 debit to pushdown capital. A $9,400,000 debit to pushdown capital.
ANS:
c
Calculations for Questions 76 and 77: Salsa’s entry is: Retained earnings Identifiable net asset revaluations
400,000 7,500,000 Pushdown capital
7,900,000
The bargain gain on the acquisition is ($1,900,000+$7,500,000) - $9,100,000 = $300,000 Prance’s entry to record the acquisition on its own books is: Investment in Salsa 9,400,000 Cash Bargain gain Eliminating entry (E) is: Capital stock Pushdown capital
1,500,000 7,900,000 Investment in Salsa
© Cambridge Business Publishers, 2023 3-30
9,100,000 300,000
9,400,000
Advanced Accounting, 5th Edition
78.
Topic: IFRS for consolidation LO 5 IFRS 10, Consolidated Financial Statements a. b. c. d. ANS:
79.
80.
d
Topic: IFRS for equity investments LO 5 Buttenhaus, a German company that reports using IFRS, owns 45% of the voting stock of Zeta. Buttenhaus should consolidate Zeta’s accounts with its own in its annual report, per IFRS 10 a. b. d. c.
Never Buttenhaus has power over Zeta. If Buttenhaus is Zeta’s primary beneficiary. If Buttenhaus significantly influences Zeta’s returns.
ANS:
b
Topic: IFRS for special purpose entities LO 5 Buttenhaus, a German company that reports using IFRS, has a financial relationship with Zeta, but does not own any of its voting stock. When should Buttenhaus consolidate Zeta’s accounts with its own in its annual report? a. b.
d.
Never If Zeta is a variable interest entity and a special purpose entity, Buttenhaus should consolidate it. If Zeta is a variable interest entity and Buttenhaus is its primary beneficiary, Buttenhaus should consolidate it. If Buttenhaus controls Zeta’s operations, Buttenhaus should consolidate it.
ANS:
d
c.
81.
Provides a measurable set of criteria for consolidation, based on the level of equity ownership. Requires joint ventures to be consolidated with the investor’s financial statements. Converges IFRS with U.S. GAAP by requiring the same measure of control now required by U.S. GAAP. Provides a single model for assessing control that is applicable to all investor-investee relationships.
Topic: IFRS for special purpose entities LO 5 Lidi uses IFRS, has a financial relationship with Zeta, but does not own any of its voting stock. When should Lidi consolidate Zeta’s accounts with its own in its annual report? a. b. c. d.
When Lidi controls Zeta When Lidi is Zeta’s primary beneficiary When Zeta is a variable interest entity When Lidi buys Zeta’s stock
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-31
ANS: 82.
83.
Topic: IFRS consolidation policy LO 5 According to IFRS, the financial statements of two legal entities should be presented on a consolidated basis if: a. b. c. d.
One company owns a majority of the voting stock of the other company One company has decision making control over the other company One company is a major supplier of the other company One company is a spinoff of the other company
ANS:
b
Topic: U.S. GAAP and IFRS for consolidation of special purpose entities LO 3, 5 What is the difference between U.S. GAAP and IFRS in consolidation policy for special purpose entities? a. b. c. d. ANS:
84.
a
U.S. GAAP requires identification of an SPE as a variable interest entity, and then requires consolidation by the company that is the primary beneficiary of the VIE. IFRS applies the concept of control to all entities, regardless of whether they are VIEs. IFRS requires identification of an SPE as a variable interest entity, and then requires consolidation by the company that is the primary beneficiary of the VIE. U.S. GAAP applies the concept of control to all entities, regardless of whether they are VIEs. U.S. GAAP requires majority ownership of the stock of the SPE for consolidation, while IFRS applies the concept of control to all entities. IFRS requires majority ownership of the stock of the SPE for consolidation, while U.S. GAAP applies the concept of control to all entities. a
Topic: Consolidation policy under IFRS and U.S. GAAP LO 3, 5 Which statement is true concerning IFRS for consolidations? a. b. c. d. ANS:
U.S. GAAP and IFRS standards for consolidation are the same. U.S. GAAP specifies different consolidation standards for special purpose entities versus equity investments, while IFRS has the same standards for all entities. IFRS specifies different consolidation standards for special purpose entities versus equity investments, while U.S. GAAP has the same standards for all entities. U.S. GAAP always requires consolidation of special purpose entities, while IFRS never requires consolidation of special purpose entities. b
© Cambridge Business Publishers, 2023 3-32
Advanced Accounting, 5th Edition
85.
Topic: IFRS for consolidation LO 5 Which statement is true concerning IFRS for consolidations? a. b. c. d.
ANS:
All majority-owned entities must be consolidated. Pushdown accounting is prohibited. Only entities where the parent owns the stock of the entity may be consolidated. Merger costs for outside consultants adds to acquisition cost. b
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-33
PROBLEMS 1.
Topic: Motivation for off-balance-sheet financing LO 1, 2, 3 Pebble Company pays $120 million in cash to acquire all of the stock of Speck Company. The balance sheets of Pebble and Speck just after the acquisition are as follows: (in millions) Current assets Plant assets, net Investment in Speck
Pebble $ 280 4,000 120 $4,400
Speck $ 80 2,400 -$2,480
Liabilities Capital stock Retained earnings Total
$ 800 3,400 200 $4,400
$2,400 100 (20) $2,480
Speck’s assets and liabilities are reported at amounts that approximate fair value at the date of acquisition, and there are no unreported net assets. Required a. Prepare the consolidated balance sheet for Pebble and Speck at the date of acquisition. b. Now assume Pebble reports its investment in Speck using the equity method. Present Pebble’s balance sheet. c. Assume that instead of acquiring Speck’s stock, Pebble has a financial relationship with Speck. There is no acquisition cost. Present Peck’s balance sheet if: 1) Speck is a variable interest entity and Pebble is its primary beneficiary 2) Speck is a variable interest entity and Pebble is not its primary beneficiary d. Calculate and compare the debt to asset ratio for each alternative above. ANS: a.
b.
Current assets Plant assets, net Investment in Speck Goodwill Total
$ 360 6,400 -40 $6,800
Liabilities Capital stock Retained earnings Outside equity Total
$3,200 3,400 200 -$6,800
Current assets Plant assets, net Investment in Speck Goodwill Total
$ 280 4,000 120 -$4,400
Liabilities Capital stock Retained earnings Outside equity Total
$ 800 3,400 200 -$4,400
© Cambridge Business Publishers, 2023 3-34
Advanced Accounting, 5th Edition
c.1)
c.2)
d.
Current assets Plant assets, net Investment in Speck Goodwill Total
$ 480 6,400 -40 $6,920
Liabilities Capital stock Retained earnings Noncontrolling interest Total
$3,200 3,400 200 120 $6,920
Current assets Plant assets, net Investment in Speck Goodwill Total
$ 400 4,000 --$4,400
Liabilities Capital stock Retained earnings Noncontrolling interest Total
$ 800 3,400 200 -$4,400
Debt to assets: a. $3,200/$6,800 = 47% b. $800/$4,400 = 18% c 1) $3,200/$6,920 = 46% c 2) $800/$4,400 = 18% Speck is significantly more leveraged than Pebble. Pebble avoids reporting higher leverage by not consolidating Speck. Reporting Speck as an equity investment or not being Speck’s primary beneficiary allows Pebble to hide Speck’s debt situation from Pebble’s shareholders.
2.
Topic: Variable interest entities LO 3 A U.S. company does business with a special purpose entity, formed to complete a one-year project. Qualitative factors are inconclusive regarding whether the SPE is a variable interest entity, so the company asks you to do a quantitative analysis. Here is information on expected cash flows for the SPE at the end of one year (all dollar amounts below are in thousands): Expected Cash Flows $3,000 1,200 600
Probability 0.70 0.20 0.10
The SPE was formed with an investment of $2,000, financed with $1,750 in debt and $250 in equity from outside investors. A discount rate of 20% is appropriate. Required a. Is this SPE a variable interest entity, based on your quantitative analysis? Show calculations clearly and explain your answer. b. If the answer to Part a. is “yes,” how should the company decide if it should consolidate the SPE? c. If the answer to Part a. is “no,” how should the company decide if it should consolidate the SPE?
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-35
ANS: (in thousands) a. Cash Present flows Value $3,000 $2,500 1,200 1,000 600 500
Resid. E(PV) Investment Returns E(G) E(L) $1,750 $2,000 $ 500 $350 200 2,000 (1,000) $(200) 50 2,000 (1,500) ____ (150) $2,000 $350 $(350) Equity of $250 is not enough to absorb expected losses, so the SPE is a variable interest entity.
3.
Prob 0.70 0.20 0.10
b.
Consolidate if the company is the VIE’s primary beneficiary (has the power to direct activities that significantly affect the VIE’s performance and absorbs/benefits from the losses/gains significant to the VIE).
c.
Entities that are not SPEs are evaluated based on shares owned, so the VIE will not be consolidated.
Topic: Variable interest entities LO 3 Dendeng Financial Group forms a separate legal entity, TCom, to provide financing services for Dendeng and other companies. The entity is financed by $510 million, of which $440 million is unsubordinated debt financing, and the remainder is equity funding obtained from outside investors. TCom is expected to operate for one year and generate the following cash flows at the end of the year (in millions): Expected Cash Flows $720 600 300
Probability 0.60 0.20 0.20
A risk-adjusted discount rate of 20% is appropriate. Required a. Is TCom a variable interest entity, per U.S. GAAP? Provide both qualitative and quantitative evaluations. b. Based on your conclusion in part a., who should consolidate TCom? Explain how this decision is made.
© Cambridge Business Publishers, 2023 3-36
Advanced Accounting, 5th Edition
ANS: a.
TCom appears to be able to finance its activities without additional subordinated debt. Therefore, qualitative analysis would likely lead to the conclusion that TCom is not a VIE. Quantitative analysis is as follows: (in millions) Cash Present Flows Value $720 $600 600 500 300 250
b. 4.
Prob 0.60 0.20 0.20
E(PV) $360 100 50 $510
Investment $510 510 510
Resid. Returns $ 90 (10) (260)
E(G) $54 ___ $54
E(L) $ (2) (52) $(54)
The equity interest of $510 - $440 = $70 million is sufficient to absorb expected losses of $54 million; therefore, TCom is not a VIE. The entity that controls TCom should consolidate it. If no entity owns a majority of its shares, it is likely that no one will consolidate it.
Topic: Variable interest entities, U.S. GAAP and IFRS LO 3, 5 Xeron Company forms a separate legal entity, Yolar, to develop new product technology. The entity is financed by $260 million, of which $235 million is debt financing, and the remainder is equity funding obtained from outside investors. Xeron guarantees Yolar’s debt, and is heavily involved with Yolar’s business activities. Yolar is expected to operate for one year and generate the following cash flows at the end of the year (in millions): Expected Cash Flows $448 336 224 112
Probability 0.10 0.50 0.30 0.10
A risk-adjusted discount rate of 12% is appropriate. Required a. Assume qualitative analysis is not conclusive regarding whether or not Yolar is a variable interest entity. Based on quantitative analysis, is Yolar a variable interest entity, per U.S. GAAP? Show calculations to justify your answer. b. Who should consolidate Yolar? Explain how this decision is made. c. Now assume Xeron follows IFRS. Should Xeron consolidate Yolar? Justify your answer.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-37
ANS: a.
b.
c.
5.
(in millions) Cash Present Flows Value $448 $400 336 300 224 200 112 100
Prob 0.10 0.50 0.30 0.10
E(PV) $ 40 150 60 10 $260
Investment $260 260 260 260
Resid. Returns $ 140 40 (60) (160)
E(G) $ 14 20 ____ $ 34
E(L)
$ (18) (16) $(34)
The equity interest of $25 million cannot absorb expected losses of $34 million; therefore, Yolar is a VIE. Because Yolar is a VIE, the primary beneficiary should consolidate it. The PB is the company that has the power to direct the activities of the VIE that most significantly affect its performance, and absorbs the VIE’s expected losses and/or gains that are potentially significant to the VIE. Since Xeron guarantees Yolar’s debt and appears to direct its decisions, it is likely that it is Yolar’s PB and should consolidate it. IFRS has the same criteria for consolidation, whether the investor owns the voting stock of the investee or has a financial relationship with the investee. Xeron should consolidate Yolar if it has power over it, has exposure to its returns, and can use power to influence those returns. Since Xeron is “heavily involved with Yolar’s business activities” and guarantees its debt, it appears likely that the IFRS criteria for consolidation are met.
Topic: Eliminating entries, identifiable intangibles LO 4 Patterson Company acquires all of the stock of Slees Company for $35 million in cash. At the date of acquisition, Slees’ equity accounts consist of capital stock of $3 million, retained earnings of $20 million, and treasury stock of $5 million. Slees’ assets and liabilities are reported on its books at amounts approximating fair value, except that property with a book value of $10 million has a fair value of $12 million, and previously unreported identifiable intangible assets with a fair value of $15 million meet the criteria for capitalization per ASC Topic 805. Required Prepare working paper eliminating entries (E) and (R) to consolidate the balance sheet accounts of Patterson and Slees at the date of acquisition. ANS: (E) Capital stock Retained earnings
3,000,000 20,000,000 Treasury stock Investment in Slees
(R) Property Identifiable intangibles
2,000,000 15,000,000 Investment in Slees
© Cambridge Business Publishers, 2023 3-38
5,000,000 18,000,000
17,000,000
Advanced Accounting, 5th Edition
6.
Topic: Eliminating entries, goodwill LO 4 Patterson Company acquires all of the stock of Slees Company for $12 million in cash. At the date of acquisition, Slees’ equity accounts consist of capital stock of $4 million, retained deficit of $2 million, and accumulated other comprehensive income of $1 million. Slees’ assets and liabilities are reported on its books at amounts approximating fair value, except that property with a book value of $10 million has a fair value of $9 million. Required a. Prepare a schedule calculating the goodwill to be recognized for this acquisition. b. Prepare working paper eliminating entries (E) and (R) to consolidate the balance sheet accounts of Patterson and Slees at the date of acquisition. ANS: a. Acquisition cost Slees book value Excess of acquisition cost over book value Revaluation: property Goodwill
$12,000,000 (3,000,000) 9,000,000 1,000,000 $10,000,000
(E) Capital stock AOCI
4,000,000 1,000,000 Retained deficit Investment in Slees
(R) Goodwill
10,000,000 Property Investment in Slees
7.
2,000,000 3,000,000
1,000,000 9,000,000
Topic: Consolidation eliminating entries, revaluation of reported assets, goodwill LO 4 Pierce Corporation acquires all the voting stock of Stick Company for $100 million in cash. Stick’s equity accounts at the date of acquisition total $20 million, consisting of the following: Capital stock…………………………………………………… $ 5 million Retained earnings………………………………………….. 15 million Stick’s assets and liabilities are reported at amounts approximating fair value, except its plant assets are undervalued by $8 million. It has no unreported identifiable intangible assets. Required Prepare eliminating entries (E) and (R) for the consolidation working paper at the date of acquisition.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-39
ANS: (E) Capital stock Retained earnings
5,000,000 15,000,000 Investment in Stick
(R) Plant assets Goodwill
20,000,000
8,000,000 72,000,000 Investment in Stick
8.
80,000,000
Topic: Consolidation eliminating entries, revaluation of reported assets LO 4 Gorman Inc. acquires all of the voting stock of Elvan Company for $20 million in cash, an amount that is $15 million above the book value of Elvan’s net assets. At the date of acquisition, Elvan’s plant assets were overvalued by $8 million and its reported intangible assets were undervalued by $23 million. Elvan’s other identifiable assets and liabilities are reported at amounts approximating fair value at the date of acquisition, and it has no previously unreported identifiable intangible assets. Required Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS: (E) Shareholders’ equityElvan
5,000,000 Investment in Elvan
(R) Intangible assets
23,000,000 Investment in Elvan Plant assets
9.
5,000,000
15,000,000 8,000,000
Topic: Consolidation eliminating entries, revaluation of reported assets and liabilities, goodwill LO 4 Plum Corporation acquired all the stock of Sudbury Company, at an acquisition cost of $600 million. Sudbury’s book value at the date of acquisition was $100 million. Sudbury's assets and liabilities are carried at amounts approximating fair value, except its equipment is overvalued by $225 million, its long-term debt is overvalued by $30 million, and its trademarks are undervalued by $80 million. Sudbury has no previously unreported identifiable intangible assets. Required Prepare consolidation eliminating entries (E) and (R) at the date of acquisition.
© Cambridge Business Publishers, 2023 3-40
Advanced Accounting, 5th Edition
ANS: (in millions) (E) Shareholders’ equity-Sudbury
100 Investment in Sudbury
(R) Goodwill Trademarks Long-term debt
100
615 80 30 Investment in Sudbury Equipment
10.
500 225
Topic: Consolidation eliminating entries, revaluation of reported assets, previously unreported intangible assets, goodwill LO 4 Pounce Corporation acquired all of the stock of Stubey Company, at an acquisition cost of $70 million. Stubey’s book value at the time was $45 million. Stubey’s current assets and current liabilities were carried at amounts approximating fair value. However, its plant assets were overvalued by $20 million. Stubey also has previously unreported customer lists valued at $10 million. Required Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS: (in millions) (E) Shareholders’ equity-Stubey
45 Investment in Stubey
(R) Goodwill Identifiable intangible assets
35 10 Investment in Stubey Plant assets
Test Bank, Chapter 3
45
25 20
© Cambridge Business Publishers, 2023 3-41
11.
Topic: Consolidation eliminating entries, revaluation of reported assets and liabilities, goodwill previously reported by subsidiary LO 4 Prop Inc. acquires all the voting stock of Sorter Company for $30 million in cash. At the date of acquisition, Sorter’s balance sheet is as follows (in millions):
Tangible assets Goodwill Liabilities Equity
Book Value Dr (Cr) $20 2 (16) (6)
Fair Value Dr (Cr) $24 6 (15)
Sorter has previously unreported identifiable intangible assets, in the form of brand names and developed technology, valued at $6 million at the date of acquisition. Required Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS:(in millions) (E) Shareholders’ equity – Sorter
6 Investment in Sorter
(R) Goodwill (new) Tangible assets Identifiable intangible assets Liabilities
6
15 4 6 1 Investment in Sorter Goodwill (old)
12.
24 2
Topic: Acquisition entry, consolidation eliminating entries, revaluation of reported assets, goodwill LO 4 Piper Corporation acquired all of the stock of Simon Corporation by issuing 500,000 shares of $0.50 par stock with a market value of $10 per share. Registration fees were $100,000 and legal fees were $200,000, all paid in cash. Simon’s book value at the date of acquisition was consisted of capital stock reported at $150,000, retained earnings of $600,000, and accumulated other comprehensive loss of $15,000. At the date of acquisition, all of Simon’s assets and liabilities were reported at amounts approximating fair value, except that its plant and equipment was overvalued by $200,000. Simon also has previously unreported developed technology with a fair value of $2,500,000, and reportable per ASC Topic 805. Required a. Prepare the entry Piper made to report the acquisition on its own books. b. Prepare consolidation eliminating entries (E) and (R) at the date of acquisition.
© Cambridge Business Publishers, 2023 3-42
Advanced Accounting, 5th Edition
ANS: a. Investment in Simon Merger expenses
5,000,000 200,000 Cash Common stock Additional paid-in capital
b.
(E) Capital stock Retained earnings
300,000 250,000 4,650,000
150,000 600,000 Accumulated other comprehensive loss Investment in Simon
(R) Goodwill Identifiable intangible assets
15,000 735,000
1,965,000 2,500,000 Plant and equipment Investment in Simon
13.
200,000 4,265,000
Topic: Acquisition entry, consolidation eliminating entries, revaluation of reported assets, previously unreported intangibles, preacquisition contingency, deferred taxes LO 4 Photomax Corporation acquired all of the stock of Synapsis Corporation by issuing 1,000,000 shares of $1 par stock with a market value of $40 per share. Registration fees were $300,000 and legal fees were $500,000, all paid in cash. Synapsis’ book value at the date of acquisition was $3,000,000, consisting of capital stock reported at $500,000, retained earnings of $2,600,000, and accumulated other comprehensive loss of $100,000. At the date of acquisition, all of Synapsis’ assets and liabilities were reported at amounts approximating fair value, except that its plant and equipment was overvalued by $8,000,000. Synapsis also had unreported developed technology valued at $12,000,000, and unreported warranty liabilities of $5,000,000. Because this is a nontaxable acquisition, deferred tax assets valued at $1,200,000 were reported in consolidation at the date of acquisition. Required a. Prepare the entry Photomax made to report the acquisition on its own books. b. Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS: a. Investment in Synapsis Merger expenses
40,000,000 500,000 Cash Common stock Additional paid-in capital
Test Bank, Chapter 3
800,000 1,000,000 38,700,000
© Cambridge Business Publishers, 2023 3-43
b.
(E) Capital stock Retained earnings
500,000 2,600,000 Accumulated other comprehensive loss Investment in Synapsis
(R) Goodwill Deferred tax assets Identifiable intangible assets
100,000 3,000,000
36,800,000 1,200,000 12,000,000 Plant and equipment Warranty liabilities Investment in Synapsis
14.
8,000,000 5,000,000 37,000,000
Topic: Consolidation eliminating entries, previously unreported intangible assets, bargain purchase LO 4 Petrie Corporation acquired all the stock of Slab Company, at an acquisition cost of $25 million in cash. Slab’s book value at the time was $18 million. Slab’s net assets are reported at amounts approximating market value at the date of acquisition. However, it has previously unreported identifiable intangible assets, valued at $9 million. Required a. Prepare the entry Petrie makes to record the acquisition. b. Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS: a.
The acquisition cost of $20 million is less than the fair value of identifiable net assets acquired of $22 million (= $15 million + $7 million). Therefore, the investment is recorded at $22 million and a gain on acquisition is reported. (in millions) Investment in Slab
27 Cash Gain on acquisition
b.
(in millions) (E) Shareholders’ equity-Slab
25 2
18 Investment in Slab
(R) Identifiable intangible assets
9 Investment in Slab
© Cambridge Business Publishers, 2023 3-44
18
9
Advanced Accounting, 5th Edition
15.
Topic: Acquisition entry, consolidation eliminating entries, previously unreported intangible assets, bargain purchase LO 4 Prep Corporation acquired all the stock of Silco Company, by issuing one million shares of no-par capital stock with a date-of-acquisition market value of $5/share. Stock registration fees were $100,000, and outside consultants’ fees were $75,000, both paid in cash. In addition, vested stock options, valued at $200,000, were converted to Prep stock, and the acquisition included an earnout valued at $50,000 at the date of acquisition. Silco’s book value at the time was $3.5 million. Silco’s net assets are reported at amounts approximating market value at the date of acquisition. However, it has previously unreported identifiable intangible assets, valued at $1.8 million. Required a. Prepare the entry Prop makes to record the acquisition. b. Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS: a. Investment in Silco Merger expenses
5,300,000 75,000 Cash Capital stock APIC Earnout liability Bargain gain
b.
175,000 4,900,000 200,000 50,000 50,000
(E) Shareholders’ equity-Silco
3,500,000 Investment in Silco
3,500,000
(R) Identifiable intangible assets
1,800,000 Investment in Silco
16.
1,800,000
Topic: Acquisition and eliminating entries, goodwill LO 4 Peter Inc. acquired all of the stock of Sellers Company in an acquisition reported as a stock acquisition. Sellers’ trial balance at the date of acquisition, along with the fair values of its assets and liabilities are:
Tangible assets Intangible assets Liabilities Capital stock Retained earnings Accumulated other comprehensive income Total
Test Bank, Chapter 3
Book Value Dr (Cr) $ 80,000 10,000 (65,000) (15,000) (9,000) (1,000) $ 0
Fair value Dr (Cr) $ 50,000 30,000 (67,000)
© Cambridge Business Publishers, 2023 3-45
Peter pays $45,000 in cash to Sellers’ former shareholders. The acquisition also includes an earnout valued at $2,000, and vested stock options held by Sellers employees, converted to Peter stock, valued at $1,000. Outside consulting fees connected with the acquisition were $500, paid in cash. Required a. Prepare the journal entry Peter made to record the stock acquisition on its own books. b. Prepare working paper eliminating entries (E) and (R) to combine the accounts of Peter and Sellers at the date of acquisition. ANS: a. Investment in Sellers Merger expenses
48,000 500 Cash Earnout liability APIC
b.
(E) Capital stock Retained earnings AOCI
45,500 2,000 1,000
15,000 9,000 1,000 Investment in Sellers
(R) Intangible assets Goodwill
25,000
20,000 35,000 Liabilities Tangible assets Investment in Sellers
17.
2,000 30,000 23,000
Topic: Acquisition entry, consolidation eliminating entries, identifiable intangibles, preacquisition contingency, earnout LO 4 Serano Corporation’s trial balance is as follows:
Cash and receivables Inventories Property, plant, and equipment, net Liabilities Capital stock Retained deficit
© Cambridge Business Publishers, 2023 3-46
Serano Dr (Cr) $ 200 600 7,500 (7,600) (720) 20 $ 0
Advanced Accounting, 5th Edition
An analysis of Serano’s assets and liabilities reveals that its inventories are overvalued by $100 and its property, plant and equipment is overvalued by $3,000. In addition, the following items are not currently reported on Serano’s balance sheet:
• • •
Customer contracts, valued at $30 In-process research and development, valued at $200 Expected future warranty liabilities with a present value of $15
Pago issues new stock with a market value of $700 to acquire the assets and liabilities of Serano. Stock registration fees are $50, paid in cash. Consulting, accounting, and legal fees connected with the merger are $100, paid in cash. In addition, Pago enters into an earnings contingency agreement, whereby Pago will pay the former shareholders of Serano an additional amount if Serano’s performance meets certain minimum levels. The present value of the contingency is estimated at $25. Required a. Prepare the journal entry or entries Pago makes to record the acquisition. b. Prepare consolidation eliminating entries (E) and (R) necessary to consolidate the trial balances of Pago and Serano at the date of acquisition ANS: a. Investment in Serano Merger expenses
725 100 Cash Earnings contingency liability Capital stock
b.
(E) Capital stock
150 25 650
720 Retained deficit Investment in Serano
(R) Identifiable intangibles Goodwill
230 2,910 Inventories Property, plant and equipment Warranty liabilities Investment in Serano
Test Bank, Chapter 3
20 700
100 3,000 15 25
© Cambridge Business Publishers, 2023 3-47
18.
Topic: Eliminating entries, previously unreported intangibles, goodwill LO 4 Pilot Supplies acquires all the voting stock of Stive Automotive for $65,000 in cash. Stive’s trial balance at the date of acquisition is: Dr (Cr) Current assets………………………………………………………. $ 2,000 Property, plant and equipment……………………………. 14,000 Current liabilities…………………………………………………. (3,000) Long-term liabilities…………………………………………….. (15,000) Capital stock………………………………………………………… (2,000) Retained deficit…………………………………………………… 3,500 Accumulated other comprehensive loss……………… 500 Total…………………………………………………………………… $ 0 Date-of-acquisition book values approximate fair value for all reported assets and liabilities. The following previously unreported intangibles are identified as belonging to Stive, along with their estimated fair values at the date of acquisition: Synergies with Pilot technologies …………………………..…………………………. Order backlogs……………………………………………………………………………………. Technical expertise of workforce………………………………………………………… Cost savings on future contracts………………………………………………………… Developed technology………………………………………………………………………..
$ 5,000 2,000 10,000 4,000 15,000
Required a. Prepare a schedule calculating the goodwill to be recognized for this acquisition. b. Prepare the eliminating entries necessary to consolidate the balance sheet accounts of Pilot and Stive at the date of acquisition. ANS: a. Acquisition cost Stive’s book value Excess of acquisition cost over book value Excess of fair value over book value: Order backlogs Developed technology Goodwill b.
$ 65,000 2,000 67,000 $ 2,000 15,000
17,000 $50,000
(E) Capital stock 2,000 Investment in Stive 2,000 Retained deficit 3,500 AOCL 500 To eliminate Stive’s shareholders’ equity accounts and the book value portion of the investment account.
© Cambridge Business Publishers, 2023 3-48
Advanced Accounting, 5th Edition
(R) Order backlogs 2,000 Developed technology 15,000 Goodwill 50,000 Investment in Stive 67,000 To revalue Stive’s assets and liabilities to fair value and eliminate the difference between book value and fair value of Stive’s net assets from the investment account. 19.
Topic: Eliminating entries, previously unreported intangibles, goodwill, pushdown accounting LO 4 Pilot Supplies acquires all the voting stock of Stive Automotive for $65,000 in cash. Stive’s trial balance at the date of acquisition is: Dr (Cr) Current assets………………………………………………………. $ 1,800 Property, plant and equipment……………………………. 14,000 Current liabilities…………………………………………………. (3,000) Long-term liabilities…………………………………………….. (15,000) Capital stock………………………………………………………… (2,000) Retained deficit…………………………………………………… 4,000 Accumulated other comprehensive loss……………… 200 Total…………………………………………………………………… $ 0 Date-of-acquisition book values approximate fair value for all reported assets and liabilities. The following previously unreported intangibles are identified as belonging to Stive, along with their estimated fair values at the date of acquisition: Synergies with Pilot technologies …………………………..…………………………. Order backlogs……………………………………………………………………………………. Technical expertise of workforce………………………………………………………… Cost savings on future contracts………………………………………………………… Developed technology………………………………………………………………………..
$ 5,000 4,000 10,000 6,000 20,000
Stive elects to use pushdown accounting to revalue its assets and liabilities at the date of acquisition. Required a. Prepare a schedule calculating the goodwill for this acquisition. b. Prepare the entry Stive makes to adjust its accounts using pushdown accounting. c. Prepare the eliminating entry or entries necessary to consolidate the balance sheet accounts of Pilot and Stive at the date of acquisition. ANS: a. Acquisition cost Stive’s book value Excess of acquisition cost over book value Excess of fair value over book value: Order backlogs Developed technology Goodwill Test Bank, Chapter 3
$ 65,000 2,200 67,200 $ 4,000 20,000
24,000 $43,200
© Cambridge Business Publishers, 2023 3-49
b. Order backlogs Developed technology Goodwill Retained deficit AOCL Pushdown capital
4,000 20,000 43,200 4,000 200 63,000
c. (E) Capital stock 2,000 Pushdown capital 63,000 Investment in Stive 65,000 To eliminate Stive’s shareholders’ equity accounts against the investment account. 20.
Topic: Acquisition entry, consolidation eliminating entries, registration and out-of-pocket costs, revaluation of reported assets, previously unreported identifiable intangibles LO 4 Pfizer acquires all of Sosa’s 1,400 million shares for $30/share in cash plus 1,400 million shares of Pfizer stock, $0.05/share par value, valued at $15/share. Registration fees for issuing the new Pfizer shares are $200 million, and outside consulting fees are $130 million. Both fees are paid in cash. The book values of Sosa’s assets and liabilities approximate fair value, except for the following: • • •
Plant assets are overvalued by $3,000 million Unreported license agreements are valued at $5,000 million Unreported brand names are valued at $20,000 million
Sosa’s equity is reported as follows at the date of acquisition (in millions): Common stock, par value Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock
Dr (Cr) $ (380) (7,100) (10,500) (230) 10
Required a. Prepare the entry Pfizer makes on its own books to record the acquisition. b. Prepare eliminating entries (E) and (R) to consolidate the balance sheet accounts of Pfizer and Sosa at the date of acquisition.
© Cambridge Business Publishers, 2023 3-50
Advanced Accounting, 5th Edition
ANS: (in millions) a. Investment in Sosa Merger expenses
63,000 130 Cash Common stock APIC
b.
(E) Common stock APIC Retained earnings Accumulated other comprehensive income
42,330 70 20,730 380 7,100 10,500 230
Treasury stock Investment in Sosa (R) Goodwill Identifiable intangible assets
10 18,200 22,800 25,000
Plant assets Investment in Sosa 21.
3,000 44,800
Topic: Consolidation eliminating entries, pushdown accounting LO 4 Pacifica Company acquires all the voting stock of Southern Industries for $85 million in cash, and accounts for the acquisition as a stock acquisition. Balance sheet information at the date of acquisition is as follows (in millions): Pacifica Book Value Dr (Cr) Current assets………………………………… $ 15 Plant and equipment, net………………. 400 Investment in Southern………………… 85 Liabilities……………………………………….. (350) Capital stock………………………………….. (50) Retained earnings………………………….. (100) Total………………………………………………. $ 0
Southern_________ Book Value Fair Value Dr (Cr) Dr (Cr) $ 3 $ 6 160 65 -(155) (153) (3) (5) $ 0
Southern has previously unreported identifiable intangibles with a fair value of $50 million. Southern elects to use pushdown accounting as of the date of acquisition. Required a. Prepare the entry Southern makes on its own books at the date of acquisition, using pushdown accounting. b. Prepare the consolidation eliminating entry or entries necessary to consolidate the balance sheets of Pacifica and Southern at the date of acquisition.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-51
ANS: (in millions) a. Current assets 3 Liabilities 2 Retained earnings 5 Identifiable intangibles 50 Goodwill 117 Plant and equipment 95 Pushdown capital 82 To revalue Southern’s net assets to fair value and reset retained earnings to zero. b. (E) Capital stock Pushdown capital Investment in Southern 22.
3 82 85
Topic: Acquisition entry, consolidation eliminating entries, identifiable intangibles, preacquisition contingency, employee compensation LO 4 Pinoy Company acquired all the stock of Schell Company by issuing 1,000,000 shares of $0.50 par stock with a market value of $30 per share. Registration fees were $250,000 and legal fees were $150,000, all paid in cash. Pinoy also made cash severance payments of $1,800,000 to Schell’s former employees, and promised payments to former owners of Schell, who are now employees of Pinoy, with an expected present value of $2,000,000. These payments will be terminated if the employee is no longer employed by Pinoy. Schell’s book value at the date of acquisition was $2,000,000, consisting of $600,000 in capital stock and $1,400,000 in retained earnings. All of Schell's assets and liabilities are carried at amounts approximating fair value, except that long-term debt is overvalued by $200,000, and plant assets are overvalued by $5,000,000. Schell also has unreported in-process research & development, capitalizable per GAAP, valued at $20,000,000, and an unreported pending lawsuit, in which it is the defendant, valued at $2,800,000 and reportable per GAAP. Required a. Prepare Pinoy’s entry to record the acquisition of Schell. b. Prepare the necessary consolidation working paper eliminating entries (E) and (R) to consolidate the balance sheets of Pinoy and Schell at the date of acquisition. ANS: a. Investment in Schell Merger expenses
31,800,000 150,000 C/S (1,000,000@$0.50) APIC [(1,000,000@$29.50) – $250,000] Cash ($250,000 + $150,000 + $1,800,000)
500,000 29,250,000 2,200,000
Note: The contingent consideration is compensation for future services and not part of acquisition cost. © Cambridge Business Publishers, 2023 3-52
Advanced Accounting, 5th Edition
b.
(E) Capital stock Retained earnings
600,000 1,400,000 Investment in Schell
2,000,000
(R) Long-term debt In-process R&D Goodwill
200,000 20,000,000 17,400,000 Plant assets Lawsuit liability Investment in Schell
23.
5,000,000 2,800,000 29,800,000
Topic: Derive acquisition information, eliminating entries LO 4 Parkside Company issued stock to acquire all the voting shares of Spark Company. The trial balances of Parkside and Spark immediately prior to acquisition, and the consolidated balance sheet at the date of acquisition, appear below. Parkside (in millions) Current assets Plant & equipment, net Liabilities Capital stock Retained earnings Total
Spark Dr (Cr)
$ 300 1,600 (1,000) (800) (100) $ 0
$ 104 640 (600) (300) 156 $ 0
Parkside Company and Subsidiary Consolidated Balance Sheet Date of Acquisition (in millions) Assets Liabilities & Equity Current assets $ 354 Liabilities $1,600 Plant & equipment, net 1,750 Equity Identifiable intangibles 400 Capital stock 1,260 Goodwill 446 Retained earnings 90 Total assets $2,950 Total liabilities & equity $2,950 The carrying value of Spark’s current assets and all liabilities equaled their fair values at the date of acquisition. Parkside paid stock registration fees and out-of-pocket legal and consulting fees in cash. Required a. Calculate the following amounts: 1) Amount of out-of-pocket merger costs paid in cash 2) Amount of registration fees paid in cash 3) Difference between fair and book value of Spark’s plant & equipment 4) Acquisition cost b. Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-53
ANS: (in millions) a.
1) Consolidated retained earnings is $10 less than Parkside’s retained earnings prior to acquisition; therefore merger expenses are $10. 2) Consolidated current assets are $50 less than the combined current assets of Parkside and Spark just prior to acquisition; merger expenses are $10, so registration fees are $40. 3) Consolidated plant & equipment is $490 less than the combined balances for Parkside and Spark. 4) Parkside acquired Spark by issuing stock and paying registration fees and legal and consulting fees. Consolidated capital stock is $460 higher than Parkside’s capital stock immediately prior to the acquisition. From 1) and 2), merger expenses are $10 and registration fees are $40. Therefore, Parkside’s entry to record the acquisition was: Investment in Spark Merger expenses
500 10 Cash Capital stock
50 460
Acquisition cost is $500. b.
(E) Capital stock
300 Retained earnings Investment in Spark
156 144
(R) Identifiable intangibles Goodwill
400 446 Plant and equipment Investment in Spark
© Cambridge Business Publishers, 2023 3-54
490 356
Advanced Accounting, 5th Edition
24.
Topic: Step acquisition and consolidation eliminating entries LO 4 Plato Company owns 25% of the stock of Socrates Corporation, and reports its investment using the equity method. It acquires the remaining 75% of Socrates’ stock by issuing Plato no-par capital stock valued at $80 million to Socrates’ shareholders. Plato records the acquisition as a stock acquisition on its own books. At the date of acquisition, Plato’s 25% investment in Socrates was carried on Plato’s books at $12 million and had a fair value of $25 million. Socrates’ balance sheet at the date of acquisition, and fair value information on its reported assets and liabilities, is as follows: Book Value Dr (Cr) $ 5,000,000 100,000,000 (45,000,000) (10,300,000) (50,000,000) 300,000 $ 0
Current assets Property Liabilities Capital stock Retained earnings Treasury stock Total
Fair Value Dr (Cr) $ 6,500,000 105,000,000 (44,000,000)
Socrates also has previously unreported identifiable intangible assets, valued at $10 million. Required a. Prepare the journal entry or entries Plato made to record the stock acquisition on its own books. b. Prepare working paper eliminating entries (E) and (R) to combine the accounts of Plato and Socrates at the date of acquisition. ANS: a. Investment in Socrates
105,000,000 Investment in Socrates (equity method) Gain on investment (income) Capital stock
b.
12,000,000 13,000,000 80,000,000
(E) Capital stock Retained earnings
10,300,000 50,000,000 Treasury stock Investment in Socrates
300,000 60,000,000
(R) Current assets Property Liabilities Identifiable intangibles Goodwill
1,500,000 5,000,000 1,000,000 10,000,000 27,500,000 Investment in Socrates
Test Bank, Chapter 3
45,000,000 © Cambridge Business Publishers, 2023 3-55
25.
Topic: Acquisition entry, goodwill calculation, consolidation eliminating entries, previously unreported identifiable intangibles, employee compensation LO 4 Transco acquires the stock of Quicktruck. The acquisition involves the following payments: Cash paid to Quicktruck’s former shareholders Cash paid to consultants and lawyers Fair value of new stock issued, 2,000 shares, $1 par Stock registration fees, paid in cash Fair value of stock options to Quicktruck employees
$ 3,000 500 35,000 200 1,000
The stock options replace options held by Quicktruck employees, currently denominated in Quicktruck stock. Of the total fair value of options granted, 75% are vested, and the remainder are compensation for services to be provided. Quicktruck’s balance sheet at the date of acquisition appears below. Fair value information on its assets and liabilities is also provided. Quicktruck Book Value
Fair Value
Assets Current assets Fixed assets, net Patents Total assets
$ 1,000 25,000 4,000 $30,000
$ 1,300 22,000 10,000
Liabilities & equity Current liabilities Loans payable Common stock, par value Additional paid-in capital Retained earnings Accumulated OCI Treasury stock Total liabilities & equity
$ 300 21,000 100 7,400 1,000 800 (600) $30,000
300 20,000
In addition to the assets and liabilities reported on Quicktruck’s balance sheet, the following previously unreported assets and liabilities are identified as requiring recognition, per ASC Topic 805: Fair Value Franchise agreements $ 2,000 Deferred tax assets 400 Favorable leases 300 Claims payable 1,500 Required a. Prepare the entry Transco made to record the acquisition on its own books. b. Prepare a schedule calculating the excess paid over book value and its allocation to Quicktruck’s identifiable assets and liabilities and goodwill. c. Prepare eliminating entries (E) and (R) to consolidate the balance sheet accounts of Transco and Quicktruck at the date of acquisition.
© Cambridge Business Publishers, 2023 3-56
Advanced Accounting, 5th Edition
ANS: a. Investment in Quicktruck Merger expenses Prepaid compensation
38,750 500 250 Cash Common stock APIC-stock APIC-stock options
b.
3,700 2,000 32,800 1,000
Acquisition cost Book value Excess paid over book value
$38,750 8,700 30,050
Fair value – book value of Quicktruck’s identifiable net assets: Current assets Fixed assets Patents Franchise agreements Deferred tax assets Favorable leases Claims payable Loans payable Goodwill c.
(E) Common stock APIC Retained earnings Accumulated OCI
$ 300 (3,000) 6,000 2,000 400 300 (1,500) 1,000
100 7,400 1,000 800 Treasury stock Investment in Quicktruck
(R) Current assets Patents Franchise agreements Deferred tax assets Favorable leases Goodwill Loans payable
600 8,700
300 6,000 2,000 400 300 24,550 1,000 Fixed assets Claims payable Investment in Quicktruck
Test Bank, Chapter 3
5,500 $24,550
3,000 1,500 30,050
© Cambridge Business Publishers, 2023 3-57
26.
Topic: Consolidation working paper, revaluation of reported assets, previously unreported intangibles, goodwill LO 4 You are responsible for preparing the consolidated balance sheet of Princecraft and its new subsidiary, Sylvan, at the date of acquisition. The consolidation working paper as of the date of acquisition appears below. Sylvan’s assets and liabilities are reported at fair value, except that its plant and equipment is overvalued by $15,000,000, and it has previously unreported developed technology, which meets the requirements for capitalization per ASC Topic 805, valued at $20,000,000. Required a. Fill in the consolidation working paper. b. Prepare the consolidated balance sheet, in good form.
(in millions) Current assets
Princecraft
Sylvan
Dr (Cr)
Dr (Cr)
Consolidated
$ 100
$ 15
Plant and equipment, net
500
95
Investment in Sylvan
80
Identifiable intangible assets Goodwill Liabilities
(450)
(85)
Capital stock
(120)
(30)
Retained earnings
(90)
4
AOCI
(20)
(1)
Treasury stock
--
2
0
$ 0
Total
$
Dr
Cr
Dr
Cr
Dr (Cr)
ANS: a. (in millions) Current assets
Princecraft
Sylvan
Dr (Cr)
Dr (Cr)
Consolidated
$ 100
$ 15
Plant and equipment, net
500
95
Investment in Sylvan
80
Dr (Cr) $115
15 (R) 25 (E) 55 (R)
580 --
Identifiable intangible assets
(R)
20
20
Goodwill
(R)
50
50
(E)
30
Liabilities
(450)
(85)
Capital stock
(120)
(30)
Retained earnings
(90)
4
AOCI
(20)
(1)
Treasury stock
--
2
_____
0
$ 0
$101
Total
© Cambridge Business Publishers, 2023 3-58
$
(535) (120) 4 (E) (E)
1
(90) (20)
2 (E) $101
-$ 0
Advanced Accounting, 5th Edition
b.
(in millions) Assets Current assets Plant and equipment, net Identifiable intangible assets Goodwill
Total assets 27.
Liabilities $115 580 20 50
____ $765
$535
Equity Capital stock Retained earnings Accumulated other comprehensive income Total equity Total liabilities and equity
$120 90 20 230 $765
Topic: Consolidation working paper, revaluation of reported assets and liabilities, consolidated balance sheet LO 4 Information on balance sheet book values and fair values just after Python Company’s acquisition of Slither Corporation is as follows:
Current assets Plant assets Identifiable intangible assets Investment in Slither Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings/deficit Treasury stock Accumulated other comprehensive loss Total
Python Book Value Dr (Cr) $ 30,000 500,000 40,000 250,000 (100,000) (370,000) (2,000) (260,000) (108,000) 8,000 12,000 $ 0
Slither Book Value Dr (Cr) $ 4,000 50,000 6,000
Slither Fair Value Dr (Cr) $ 3,000 45,000 80,000
(3,000) (50,000) (400) (13,000) 4,000 400 2,000 $ 0
(3,000) (50,000)
Python acquires all of Slither’s common stock for $250,000 in cash.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-59
Required a. The working paper to consolidate Python and Slither at the date of acquisition appears below. Fill in eliminating entries (E) and (R). Compute the consolidated balances. (in thousands)
Python Dr (Cr)
Slither Dr (Cr)
Current assets
$ 30,000
$ 4,000
Plant assets
500,000
50,000
Investment in Slither
250,000
--
Identifiable intangible assets
40,000
6,000
--
--
Goodwill Current liabilities
(100,000)
(3,000)
Long-term liabilities
(370,000)
(50,000)
(2,000)
(400)
Additional paid-in capital
(260,000)
(13,000)
Retained earnings/deficit
(108,000)
4,000
Treasury stock Accumulated other comprehensive loss
8,000
400
12,000
2,000
Common stock
Total
b.
Dr
$
0
$
Cr
Consolidated Dr (Cr)
0
Present, in good form, the date-of-acquisition consolidated balance sheet.
ANS: a. Python Dr (Cr)
Slither Dr (Cr)
Cr
Consolidated Dr (Cr)
Current assets
$ 30,000
$ 4,000
1,000 (R)
$ 33,000
Plant assets Investment in Slither
500,000 250,000
50,000
5,000 (R) 7,000 (E) 243,000 (R)
545,000 --
Identifiable intangible assets
40,000
6,000
Dr
Goodwill
(R)
74,000
120,000
(R) 175,000
175,000
Current liabilities
(100,000)
(3,000)
(103,000)
Long-term liabilities
(370,000)
(50,000)
(420,000)
(2,000)
(400)
(E)
400
Additional paid-in capital
(260,000)
(13,000)
(E)
13,000
Retained earnings/deficit
(108,000)
4,000
4,000 (E)
(108,000)
Treasury stock Accumulated other comprehensive loss
8,000
400
400 (E)
8,000
12,000
2,000
_______
2,000 (E)
12,000
0
$262,400
Common stock
Total
© Cambridge Business Publishers, 2023 3-60
$
0
$
(2,000) (260,000)
$262,400
$
Advanced Accounting, 5th Edition
0
b.
Assets Current assets Plant assets Identifiable intangible assets Goodwill
Equity Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive loss Total equity Total liabilities and equity
_______ $873,000
Total assets
28.
Liabilities Current liabilities Long-term liabilities Total liabilities
$ 33,000 545,000 120,000 175,000
$103,000 420,000
$523,000
2,000 260,000 108,000 (8,000) (12,000)
350,000 $873,000
Topic: Consolidation working paper, identifiable intangibles, preacquisition contingency LO 4 ADL Corporation issued 1,500,000 shares of common stock with a market value of $30 per share to acquire all of Timeout Co.’s voting stock. Timeout’s book value is $17 million, and its net assets are reported at fair value, except for the following: • • • •
Current assets are undervalued by $1,000,000. Plant & equipment is undervalued by $5,000,000. Previously unrecorded identifiable intangible assets are valued at $8,000,000. There is a preacquisition contingent liability (potential lawsuit) connected with Timeout, valued at $2,500,000, which is not recorded on Timeout’s books.
Required a. Present a schedule calculating the excess of acquisition cost over book value for this acquisition and its allocation to the assets and liabilities of Timeout. b. A consolidation working paper for this acquisition, as of the date of acquisition, appears below. Fill in the worksheet as necessary to consolidate the balance sheet accounts of ADL and Timeout as of the date of acquisition.
c.
ADL Dr (Cr)
Timeout Dr (Cr)
Current assets
$ 5,000,000
$15,000,000
PP&E, net Investment in Timeout
90,000,000 37,500,000
78,000,000
Liabilities
(55,000,000)
(78,000,000)
Capital stock
(67,500,000)
(2,000,000)
Retained earnings
(10,000,000)
(15,000,000)
Total
$
$
0
Dr
Cr
Consolidated Dr (Cr)
0
Present the consolidated balance sheet at the date of acquisition, in good form.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-61
ANS: a.
Acquisition cost (1,500,000 x $30) Book value Excess of cost over book value Fair value - book value: Current assets Plant and equipment Identifiable intangibles Contingent liability Goodwill
$45,000,000 17,000,000 28,000,000 $ 1,000,000 5,000,000 8,000,000 (2,500,000)
11,500,000 $16,500,000
b. ADL Dr (Cr)
Timeout Dr (Cr)
Dr
Current assets
$ 5,000,000
$15,000,000
(R) 1,000,000
PP&E, net Investment in Timeout
90,000,000 45,000,000
80,000,000
(R) 5,000,000
Consolidated Dr (Cr)
Cr
$ 21,000,000 17,000,000 (E) 28,000,000 (R)
175,000,000 --
Identifiable intangibles
(R) 8,000,000
8,000,000
Goodwill
(R )16,500,000
16,500,000
Liabilities
(55,000,000)
(78,000,000)
Capital stock
(75,000,000)
(2,000,000)
(E) 2,000,000
Retained earnings
(10,000,000)
(15,000,000)
(R) 15,000,000
Total
$
$
0
0
2,500,000 (R)
$47,500,000
(135,500,000) (75,000,000)
__________ $47,500,000
(10,000,000) $
c. ADL and Timeout Consolidated Balance Sheet Date of Acquisition Assets Current assets Plant and equipment, net Identifiable intangibles Goodwill Total assets
© Cambridge Business Publishers, 2023 3-62
$ 21,000,000 175,000,000 8,000,000 16,500,000 $220,500,000
Liabilities & Equity Liabilities Capital stock Retained earnings Total equity Total liabilities & equity
$135,500,000 75,000,000 10,000,000 85,000,000 $220,500,000
Advanced Accounting, 5th Edition
0
29.
Topic: Acquisition entry, goodwill calculation, consolidation working paper, revaluation of reported assets, previously unreported intangibles, preacquisition contingency, deferred taxes LO 4 Here is date-of-acquisition information on Fizzy Beverage’s assets and liabilities: Book Value Fair Value Current assets $ 2,000 $ 1,200 Property, plant and equipment, net 18,000 8,000 Total assets $ 20,000 Liabilities Capital stock Retained earnings Accumulated other comprehensive income Treasury stock Total liabilities and equity
$ 10,000 2,500 7,400
10,000
300 (200) $ 20,000
Cola King Company acquires all of the voting stock of Fizzy Beverage, paying the following amounts: Cash consideration to the former owners Fair value of new no-par common stock issued Registration fees on new stock issued, paid in cash Accounting, consulting, and attorney services, paid in cash
$40,000 50,000 500 2,000
Fizzy has the following previously unreported intangible assets meeting the criteria for separate recognition as identifiable intangible assets. Favorable lease agreements Developed technology
$ 3,000 30,000
Warranty liabilities, previously unreported by Fizzy, are valued at $8,000. In addition, the acquisition creates deferred tax liabilities valued at $4,500. Required a. Prepare the entry Cola King made to record the acquisition on its own books. b. Prepare a schedule calculating the excess paid over book value and its allocation to Fizzy’s identifiable assets and liabilities and goodwill. c. The consolidation working paper immediately following the date of acquisition, in trial balance format, appears below. Fill in the two eliminating entries necessary to consolidate Cola King and Fizzy, in the dr and cr columns. Label the entries as (E) and (R). Compute the consolidated balances and enter them on the working paper. Do not add new account titles to this working paper.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-63
Current assets Property, plant & equipment, net
Cola King Dr (Cr)
Fizzy Dr (Cr)
$ 30,000
$ 2,000
600,000
18,000
Investment in Fizzy
90,000
Identifiable intangible assets
40,000
Dr
Cr
Consolidated Dr (Cr)
Goodwill Liabilities
(568,000)
(10,000)
Capital stock
(10,000)
(2,500)
Retained earnings Accumulated other comprehensive income
(180,000)
(7,400)
(4,000)
(300)
2,000
200
Treasury stock Total
$
0
$
0
ANS: a. Investment in Fizzy Merger expenses
90,000 2,000 Cash Capital stock
b.
42,500 49,500
Acquisition cost Book value Excess paid over book value Fair value – book value of Fizzy’s identifiable net assets: Current assets Property, plant and equipment, net Identifiable intangibles Liabilities Goodwill
© Cambridge Business Publishers, 2023 3-64
$90,000 10,000 80,000 $ (800) (10,000) 33,000 (12,500)
9,700 $ 70,300
Advanced Accounting, 5th Edition
c. Cola King Dr (Cr)
Fizzy Dr (Cr)
Cr
Consolidated Dr (Cr)
Current assets Property, plant & equipment, net Investment in Fizzy
$ 30,000
$ 2,000
800 (R)
$ 31,200
600,000 90,000
18,000
10,000 (R) 10,000 (E) 80,000 (R)
608,000 --
Identifiable intangible assets
40,000
Dr
Goodwill
33,000
73,000
(R)
70,300
70,300
Liabilities
(568,000)
(10,000)
Capital stock
(10,000)
(2,500)
(E)
2,500
(10,000)
Retained earnings Accumulated other comprehensive income
(180,000)
(7,400)
(E)
7,400
(180,000)
(4,000)
(300)
(E)
300
(4,000)
2,000
200
______
0
$113,500
Treasury stock Total
30.
(R)
$
0
$
12,500 (R)
(590,500)
200 (E) $113,500
2,000 $
Topic: Acquisition entry, goodwill calculation, consolidation working paper, previously unreported identifiable intangibles LO 4 Schenk Corporation’s balance sheet immediately after its acquisition by Piaget Company is as follows: Schenk Corporation Book Value Fair Value Assets Current assets $ 3,000 $ 2,000 Plant & equipment, net 24,000 18,000 Total assets $27,000 Liabilities & Equity Current liabilities Long-term liabilities Common stock Additional paid-in capital Treasury stock Retained earnings Accumulated other comprehensive loss Total liabilities & equity
$ 3,120 20,000 20 3,000 (40) 1,000
3,200 21,000
(100) $27,000
In addition to the assets already reported by Schenk, the following previously unreported identifiable intangible assets are identified. Identifiable Intangible Asset Franchise rights Favorable leaseholds Future cost savings Advertising jingles
Test Bank, Chapter 3
Fair Value $6,000 8,000 5,000 500
© Cambridge Business Publishers, 2023 3-65
0
Piaget acquires all of the voting stock of Schenk for a total acquisition cost of $25,000. Schenk remains as a separate legal entity. You are responsible for preparing the consolidated balance sheet of Piaget and its new subsidiary, Schenk, at the date of acquisition. The working paper to consolidate the balance sheet accounts of Piaget and Schenk follows. Piaget Dr (Cr)
Schenk Dr (Cr)
Current assets
$ 15,000
$ 3,000
Plant and equipment, net
420,000
24,000
Investment in Schenk
25,000
Dr
Cr
Consolidated Dr (Cr)
Identifiable intangibles Goodwill Current liabilities
(12,000)
(3,120)
Long-term liabilities
(353,700)
(20,000)
Common stock, par value
(500)
(20)
Additional paid-in capital
(65,000)
(3,000)
600
40
(24,400)
(1,000)
Treasury stock Retained earnings AOC (income) loss Total
(5,000) $
0
100 $
0
Required Fill in the consolidation working paper as necessary to consolidate Piaget and Schenk’s balance sheet accounts at the date of acquisition. ANS: Piaget Dr (Cr)
Schenk Dr (Cr)
Current assets
$ 15,000
$ 3,000
1,000 (R)
$ 17,000
Plant and equipment, net Investment in Schenk
420,000 25,000
24,000
6,000 (R) 3,880 (E) 21,120 (R)
438,000 --
Dr
Cr
Consolidated Dr (Cr)
Identifiable intangibles
(R)
14,500
14,500
Goodwill
(R)
14,700
14,700
Current liabilities
(12,000)
(3,120)
80 (R)
(15,200)
Long-term liabilities
(353,700)
(20,000)
1,000 (R)
(374,700)
Common stock, par value
(500)
(20)
(E)
20
(500)
Additional paid-in capital
(65,000)
(3,000)
(E)
3,000
(65,000)
600
40
Retained earnings
(24,400)
(1,000)
AOC (income) loss
(5,000)
100
_______
0
$33,220
Treasury stock
Total
© Cambridge Business Publishers, 2023 3-66
$
0
$
40 (E) (E)
600
1,000
(24,400) 100 (E) $33,220
(5,000) $
0
Advanced Accounting, 5th Edition
31.
Topic: Acquisition entry, consolidation working paper, registration and consulting fees, identifiable intangibles LO 4 Mars Inc. acquired all of Wrigley Co.’s voting stock. Mars incurred the following costs for the acquisition: 50,000 shares of new Mars common stock, par value $2/share, market value $80/share, issued to the former shareholders of Wrigley
$ 4,000,000
Cash registration fees for issuing the new shares
500,000
Cash paid to former shareholders of Wrigley: there were 200,000 shares of Wrigley outstanding, and Mars agreed to pay $90 in cash for each share of outstanding Wrigley stock
18,000,000
Consulting fees paid to Goldman Sachs, in cash
1,100,000
The balance sheets of both companies immediately prior to the acquisition are as follows:
Assets Cash Receivables Inventories Plant & equipment, net Trademarks Total assets Liabilities & Equity Current liabilities Long-term liabilities Common stock, par Additional paid-in capital Retained earnings Treasury stock Total liabilities & equity
Mars Inc. Book Value
Wrigley Co. Book Value Fair Value
$ 25,000,000 2,000,000 20,000,000 99,500,000 5,000,000 $151,500,000
$
90,000 200,000 8,110,000 50,000,000 1,000,000 $ 59,400,000
$
$
$
400,000 47,000,000
500,000 70,000,000 2,000,000 55,000,000 25,000,000 (1,000,000) $151,500,000
400,000 45,000,000 1,000,000 10,000,000 6,000,000 (3,000,000) $ 59,400,000
90,000 190,000 7,000,000 40,000,000 4,000,000
In addition to the assets and liabilities already reported, Wrigley has the following previously unrecorded intangible assets that meet ASC Topic 805 requirements for capitalization: Intangible Asset Brand names Secret formulas
Fair Value $ 5,000,000 7,000,000
Required a. Prepare the journal entry Mars made to record the acquisition. b. Prepare a working paper to consolidate the balance sheet accounts of Mars and Wrigley at the date of acquisition.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-67
ANS: a. Investment in Wrigley Merger expenses
22,000,000 1,100,000 Cash Common stock APIC
19,600,000 100,000 3,400,000
b. (in thousands)
Mars Dr (Cr)
Wrigley Dr (Cr)
Cash
$ 5,400
$ 90
Receivables
2,000
200
Inventories
20,000
8,110
1,110 (R)
27,000
P&E, net Investment in Wrigley
99,500 22,000
50,000
10,000 (R) 14,000 (E) 8,000 (R)
139,500 --
Trademarks
5,000
1,000
Dr
Cr
Consolidated Dr (Cr) $ 5,490
10 (R)
2,190
(R)
3,000
9,000
Brand names
(R)
5,000
5,000
Secret formulas
(R)
7,000
7,000
Goodwill
(R)
6,120
6,120
Current liabilities
(500)
(400)
Long-term liabilities
(70,000)
(45,000)
(900) 2,000 (R)
(117,000)
Common stock, par
(2,100)
(1,000)
(E)
1,000
(2,100)
Additional paid-in capital
(58,400)
(10,000)
(E)
10,000
(58,400)
Retained earnings
(23,900)
(6,000)
(E)
6,000
(23,900)
1,000
3,000
______
0
$38,120
Treasury stock Total
© Cambridge Business Publishers, 2023 3-68
$
0
$
3,000 (E) $38,120
1,000 $
Advanced Accounting, 5th Edition
0
32.
Topic: Acquisition entry, consolidation working paper, registration and out-of-pocket costs, identifiable intangibles LO 4 Player Inc. acquired all the stock of Soccer Company. The acquisition involved the following payments: Cash paid to Soccer shareholders Cash paid to Morgan Stanley for consulting services Stock issued, 100,000 shares, $0.50 par, fair value at acquisition Stock registration fees, paid in cash Earnings contingency, to be paid in three years, present value
$ 85,000,000 12,000,000 5,000,000 600,000 2,000,000
Here are the balance sheets of Player and Soccer just prior to the acquisition. Fair value information on Turquoise Water’s assets and liabilities is also provided. Player Book Value
Soccer Book Value Fair Value
Assets Current assets Plant and equipment, net Patents and trademarks Total assets
$ 120,000,000 720,000,000 15,000,000 $ 855,000,000
$ 1,000,000 41,000,000 3,400,000 $45,400,000
$ 800,000 10,000,000 20,000,000
Liabilities & Equity Current liabilities Long-term liabilities Common stock, par value Additional paid-in capital Retained earnings Accumulated OCL Treasury stock Total liabilities & equity
$ 120,000,000 576,550,000 950,000 120,000,000 52,000,000 (4,500,000) (10,000,000) $ 855,000,000
$ 400,000 40,000,000 500,000 8,500,000 (2,000,000) (1,400,000) (600,000) $45,400,000
400,000 41,000,000
In addition to the assets reported on Soccer’s balance sheet, the following previously unreported intangible assets are identified: Bottlers’ franchise rights Skilled workforce Non-competition agreements Expected expansion into new product lines Order backlogs
Fair Value $10,400,000 15,000,000 4,000,000 5,000,000 2,000,000
Required a. Prepare the journal entry Player made to record the acquisition on its own books. b. Prepare a working paper to consolidate the balance sheet accounts of Player and Soccer at the date of acquisition. c. Present, in good form, Player’s consolidated balance sheet at the date of acquisition.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-69
ANS: a. Investment in Soccer Merger expenses
92,000,000 12,000,000 Cash Common stock APIC Earnout liability
97,600,000 50,000 4,350,000 2,000,000
b. (in thousands)
Player Dr (Cr)
Soccer Dr (Cr)
Current assets
$ 22,400
$1,000
200 (R)
$ 23,200
Plant and equipment, net
720,000
41,000
31,000 (R)
730,000
Patents and trademarks Investment in Soccer
15,000 92,000
3,400
(R)
Cr
Consolidated Dr (Cr)
16,600
35,000 --
5,000 (E) 87,000 (R)
Bottlers’ franchise rights
(R)
10,400
10,400
Non-competition agreements
(R)
4,000
4,000
Order backlogs
(R)
2,000
2,000
Goodwill
(R)
86,200
86,200
Current liabilities
(120,000)
(400)
Long-term liabilities
(578,550)
(40,000)
Common stock, par value
(1,000)
(500)
(E)
500
Additional paid-in capital
(124,350)
(8,500)
(E)
8,500
Retained earnings
(40,000)
2,000
2,000 (E)
(40,000)
Accumulated OCL
4,500
1,400
1,400 (E)
4,500
Treasury stock
10,000
600
_______
600 (E)
10,000
0
$128,200
Total
c.
Dr
$
0
$
(120,400) 1,000 (R)
(619,550) (1,000) (124,350)
$128,200
$
0
(in thousands) Assets Current assets Plant and equipment, net Identifiable intangible assets Goodwill
Total assets
© Cambridge Business Publishers, 2023 3-70
$ 23,200 730,000 51,400 86,200
Liabilities Current liabilities Long-term liabilities Total liabilities
_______
Equity Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock Total equity
$890,800
Total liabilities and equity
$ 120,400 619,550
$739,950
1,000 124,350 40,000 (4,500) (10,000)
150,850 $890,800
Advanced Accounting, 5th Edition
33.
Topic: Acquisition entry, consolidation working paper, bargain purchase, earnings contingency LO 4 Packet Industries purchased all the voting stock of Sameer Manufacturing for $95 million in cash. Accounting and legal costs connected with the acquisition were $2 million, paid in cash. The acquisition also includes an earnout, currently valued at $5 million. At the date of acquisition, the fair value of Sameer’s plant and equipment was $100 million less than carrying value. However, Sameer had $90 million in developed technology, unreported on its balance sheet, but meeting the criteria for capitalization as part of the acquisition. The trial balances of Packet and Sameer just prior to the acquisition appear below. Packet (in millions) Current assets Plant & equipment, net Liabilities Common stock Additional paid-in capital Retained earnings Total
Sameer
Dr (Cr) $ 410 1,500 (600) (10) (1,000) (300) $ 0
$ 60 500 (445) (10) (90) (15) $ 0
Required a. Prepare the journal entry Packet made on its own books to record its acquisition of Sameer. b. Prepare a working paper to consolidate the balance sheet accounts of Packet and Sameer at the date of acquisition. ANS: (all numbers in millions) a. Investment in Sameer Merger expenses
105 2 Cash Earnings contingency liability Gain on acquisition
97 5 5
Fair value of identifiable net assets acquired = $115 book value – $100 revaluation of plant and equipment + $90 previously unreported identifiable intangibles = $105
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-71
b. Packet Dr (Cr)
Dr
Cr
Consolidated Dr (Cr)
Current assets
$ 313
$ 60
Plant and equipment
1,500
500
Identifiable intangibles
--
--
(R)
90
Investment in Sameer
105
--
(R)
10
Liabilities
(605)
(445)
Common stock
(10)
(10)
(E)
10
(10)
(1,000)
(90)
(E)
90
(1,000)
(303)
(15)
(E)
15
____
$215
$215
APIC Retained earnings Total
34.
Sameer Dr (Cr)
$
0
$
$ 373 100 (R)
1,900 90
115 (E)
-(1,050)
0
(303) $
Topic: Acquisition entry, consolidation working paper, identifiable intangibles, subsidiary prior goodwill, bargain purchase LO 4 PLD Company purchased all the shares of SYS Company for $158 million in cash. At the date of acquisition, the fair value of SYS’s plant and equipment was $50 million more than carrying value. SYS also had $20 million in developed technology, unreported on its balance sheet but meeting the criteria for capitalization as part of the acquisition. The balance sheets of PLD and SYS just prior to the date of acquisition appear below. (in millions) Current assets Plant & equipment, net Goodwill Liabilities Capital stock Retained earnings Accumulated other comprehensive (income) loss Total
PLD
SYS
Dr (Cr) $ 450 1,400 -(1,135) (350) (380)
$ 50 125 60 (80) (100) (50)
$
15 0
$
(5) 0
Required a. Prepare the journal entry PLD made to record the acquisition of SYS on its own books. b. Prepare a working paper to consolidate the balance sheet accounts of PLD and SYS at the date of acquisition. ANS: (all numbers in millions) a. Investment in SYS
165 Cash Gain on acquisition
158 7
Fair value of identifiable net assets acquired = $155 book value + $50 revaluation of plant and equipment - $60 write-off of previously reported goodwill + $20 previously unreported customer lists = $165 © Cambridge Business Publishers, 2023 3-72
Advanced Accounting, 5th Edition
0
b. PLD Dr (Cr)
SYS Dr (Cr)
Current assets
$ 292
$ 50
Plant and equipment
1,400
125
(R)
50
1,575
--
--
(R)
20
20
165
--
Goodwill
--
60
Liabilities
(1,135)
(80)
Capital stock
(350)
(100)
(E)
100
(350)
Retained earnings
(387)
(50)
(E)
50
(387)
(5)
(E)
Identifiable intangibles Investment in SYS
Dr
Cr
Consolidated Dr (Cr) $ 342
155 (E)
--
10 (R)
AOC (income) loss Total
35.
15 $
0
$
60 (R)
-(1,215)
0
5
____
$225
$225
15 $
Topic: Consolidation working paper, subsidiary prior goodwill and accumulated depreciation LO 4 Provo Company purchased all the shares of Singleton Company for $250 million in cash. At the date of acquisition, the fair values of Singleton’s reported net assets equal their carrying values, except its plant and equipment (net) has a fair value of $120 million, and previously unreported identifiable intangible assets, meeting ASC Topic 805 criteria for capitalization, total $100 million. The balance sheets of Provo and Singleton just after the acquisition appear below. Provo (in millions) Current assets Plant & equipment Accumulated depreciation Investment in Singleton Goodwill Liabilities Capital stock Retained earnings Total
Singleton Dr (Cr)
$ 15 460 (120) 250 -(300) (150) (155) $ 0
$
6 200 (50)
40 (140) (20) (36) $ 0
Required a. Prepare a schedule calculating the amount of goodwill recognized for this acquisition. b. Prepare a working paper to consolidate Provo and Singleton at the date of acquisition. c. Present the consolidated balance sheet at the date of acquisition, in good form.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-73
0
ANS: (in millions) a. Acquisition cost Book value Excess Fair value – book value: Plant and equipment Identifiable intangible assets Goodwill Fair value of identifiable net assets Goodwill b.
$250 56 $194 $(30) 100 (40)
30 $164
Consolidation working paper: (in millions)
Provo Dr (Cr)
Singleton Dr (Cr)
Cr
Current assets Plant and equipment
$ 15 460
Accumulated depreciation Investment in S Co.
(120) 250
(50) --
(R)
Identifiable intangible assets
--
--
(R)
100
Goodwill
--
40
(R)
164
Liabilities
(300)
(140)
Capital stock
(150)
(20)
(E)
20
Retained earnings
(155)
(36)
(E)
36
____
$370
$370
Total
$
0
$
Dr
6 200
$
0
Consolidated Dr (Cr) $
50 (R) 30 (R) 50
21 580 (120) --
56 (E) 194 (R)
100 40 (R)
164 (440) (150) (155) $
0
c. Provo Company and Subsidiary Consolidated Balance Sheet Date of Acquisition
(in millions) Assets Current assets Plant & equipment, net of $120 in accumulated depreciation Identifiable intangible assets Goodwill Total assets
© Cambridge Business Publishers, 2023 3-74
$ 21
Liabilities & Equity Liabilities
$ 440
460 100 164 ____ $ 745
Equity: Capital stock Retained earnings Total equity Total liabilities & equity
150 155 305 $ 745
Advanced Accounting, 5th Edition
36.
Topic: Acquisition entry, consolidation working paper, previously unreported identifiable intangibles, preacquisition contingency, earnings contingency LO 4 The balance sheets of Publix Corporation and Stryker Corporation, just prior to Publix’ acquisition of all of Stryker’s voting stock, are as follows: Publix
Stryker Dr (Cr)
Cash and receivables Investment in equity securities Inventories Property, plant and equipment, net Accounts payable Long-term debt Capital stock Treasury stock Retained earnings Accumulated other comprehensive income Total
$ 1,000 200 1,850 9,000 (1,500) (3,000) (5,900) 100 (1,720) (30) $ 0
$ 300 – 600 4,430 (300) (4,000) (1,000) 100 (125) (5) $ 0
An analysis of Stryker’s assets and liabilities reveals that book values of some reported items do not reflect their fair values at the date of acquisition:
• • •
Inventories are overvalued by $350 Property, plant and equipment is overvalued by $2,200 Long-term debt is undervalued by $200
In addition, the following items are not currently reported on Stryker’s balance sheet:
• • • • • •
Favorable lease agreements, valued at $60 Skilled work force, valued at $200 Signed customer contracts for product development, valued at $50 In-process research and development, valued at $175 Favorable press reviews on Stryker’s products, valued at $5 There are lawsuits pending against Stryker, not currently recorded. The best estimate of likely losses on these lawsuits, at present value, is $6
Publix issued no-par capital stock with a market value of $2,400 for all the voting stock of Stryker. Registration fees in connection with issuing the stock are $50, paid in cash. Consulting, accounting, and legal fees connected with the merger are $80, paid in cash. In addition, Publix enters into an earnings contingency agreement, whereby Publix will pay the former shareholders of Stryker an additional amount if Stryker’s performance meets certain minimum levels. The present value of the contingency is estimated at $90.
Test Bank, Chapter 3
© Cambridge Business Publishers, 2023 3-75
Required a. Prepare Publix’s journal entry to record the acquisition of Stryker. b. The consolidation working paper at the date of acquisition appears below. Fill in Publix’s column and the elimination and consolidated balances columns as necessary to consolidate the balance sheet accounts of Publix with Stryker at the date of acquisition. Publix Dr (Cr) Cash & receivables Investment in securities
Stryker Dr (Cr)
Cr
Consolidated Dr (Cr)
$300 --
Inventories
600
PP&E, net
4,430
Accounts payable
(300)
Long-term debt
(4,000)
Capital stock
(1,000)
Treasury stock
100
Retained earnings
(125)
AOCI
Dr
(5)
Total
ANS:
a. Investment in Stryker Merger expenses
2,490 80 Capital stock Earnings contingency liability Cash
© Cambridge Business Publishers, 2023 3-76
2,350 90 130
Advanced Accounting, 5th Edition
b. Publix Dr (Cr) Cash & receivables
Stryker Dr (Cr)
Dr
Consolidated Dr (Cr)
Cr
$ 870
$ 300
$1,170
200
--
200
Inventories
1,850
600
350 (R)
2,100
PP&E, net Investment in Stryker
9,000 2,490
4,430
2,200 (R) 1,030 (E) 1,460 (R)
11,230 --
Investment in securities
Lease agreements
(R)
60
60
Customer contracts
(R)
50
50
IPR&D
(R)
175
175
(R)
3,931
Goodwill Accounts payable
(1,500)
(300)
Long-term debt
(3,000)
(4,000)
Earnings contingency liability
3,931 (1,800) 200 (R)
(90)
(90)
Lawsuit liability
6 (R)
Capital stock
(8,250)
(1,000)
Treasury stock
100
100
(1,640)
(125)
(E)
125
(30)
(5)
(E)
5
______
$5,346
$5,346
Retained earnings AOCI Total
Test Bank, Chapter 3
(7,200)
$
0
$
0
(E)
1,000
(6) (8,250)
100 (E)
100 (1,640) (30) $
© Cambridge Business Publishers, 2023 3-77
0
TEST BANK CHAPTER 4 Consolidated Financial Statements Subsequent to Acquisition MULTIPLE CHOICE 1.
2.
3.
4.
Topic: Overview of consolidation in subsequent years LO 1 On the consolidated financial statements, where does the subsidiary’s retained earnings balance appear? a. b. c. d.
On the consolidated statement of comprehensive income On the consolidated balance sheet, as an equity account On the consolidated balance sheet, as an asset account Doesn’t appear on the consolidated financial statements
ANS:
d
Topic: Overview of consolidation in subsequent years LO 1 On the consolidated financial statements, where does the parent’s dividends balance appear? a. b. c. d.
On the consolidated statement of comprehensive income On the consolidated balance sheet, as an equity account On the consolidated balance sheet, as an asset account Doesn’t appear on the consolidated financial statements
ANS:
d
Topic: Overview of consolidation in subsequent years LO 1 When consolidating the accounts of a parent and subsidiary in subsequent years, eliminating entry (O) recognizes total write-offs of subsidiary revaluations: a. b. c. d.
As of the beginning of the current year. For the current year. As of the end of the current year. As of the date of acquisition.
ANS:
b
Topic: Overview of consolidation in subsequent years LO 1 When consolidating the accounts of a parent and subsidiary in subsequent years, eliminating entry (R) recognizes revaluations of the subsidiary’s assets and liabilities: a. b. c. d.
As of the beginning of the current year. For the current year. As of the end of the current year. As of the date of acquisition.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-1
ANS: 5.
Topic: Complete equity method LO 1 How does the complete equity method, used to facilitate consolidation in subsequent years, differ from the equity method used for external reporting? a. b. c. d. ANS:
6.
The complete equity method adjusts reported income for impairment losses on previously unreported intangible assets, while the equity method used for external reporting does not. The complete equity method deducts unconfirmed profits on upstream sales to the extent of ownership interests, while the equity method used for external reporting deducts all unconfirmed profits on upstream sales. The complete equity method deducts unconfirmed profits on downstream sales to the extent of ownership interests, while the equity method used for external reporting deducts all unconfirmed profits on downstream sales. The complete equity method adjusts for upstream and downstream unconfirmed profits, while the equity method used for external reporting does not make these adjustments. a
Topic: Complete equity method LO 1 The complete equity method, used to facilitate consolidation in subsequent years, differs from the equity method used for external reporting in all the following ways except: a. b. c. d.
ANS: 7.
a
The complete equity method adjusts reported income for goodwill impairment losses, while the equity method used for external reporting does not. The equity method used for external reporting does not allow the investment balance to become negative due to reported losses, while the complete equity method adjusts the investment balance for all losses. The equity method used for external reporting adjusts reported income for unconfirmed profit on upstream sales, while the complete equity method does not. The complete equity method adjusts for all downstream unconfirmed profits, while the equity method used for external reporting only adjusts for the investor’s share of these profits. c
Topic: Complete equity method LO 1 If the parent company uses the complete equity method when accounting for its wholly-owned subsidiary on its own books, consolidated net income equals a. b. c. d.
The subsidiary’s separately reported income. The parent’s separately reported income. The parent’s separately reported income plus the subsidiary’s ending retained earnings balance. The subsidiary’s separately reported income, adjusted for revaluation write-offs.
© Cambridge Business Publishers, 2023 4-2
Advanced Accounting, 5th Edition
ANS: 8.
9.
10.
b
Topic: Complete equity method LO 1 If the parent company uses the complete equity method when accounting for its wholly-owned subsidiary on its own books: a. b. c. d.
The parent’s net income equals consolidated comprehensive income. The subsidiary’s comprehensive income equals consolidated comprehensive income. The parent’s comprehensive income equals consolidated comprehensive income. The parent’s comprehensive income equals consolidated net income.
ANS:
c
Topic: Complete equity method LO 1 At the date of acquisition, a subsidiary’s inventory (FIFO, sold in the year of acquisition) is overvalued by $500, its plant assets (10-year life, straight-line) are overvalued by $6,000, and it has previously unreported intangibles valued at $2,000 (2-year life, straight-line). Goodwill from the acquisition is not impaired in the year of acquisition. In the year of acquisition, the subsidiary reports net income of $2,500. Using the complete equity method, in the year of acquisition, the parent reports equity in the net income of the subsidiary of: a. b. c. d.
$1,600 $3,100 $2,600 $ 400
ANS:
c $2,500 + $500 + ($6,000/10) – ($2,000/2) = $2,600.
Topic: Complete equity method LO 1 At the date of acquisition, a subsidiary’s inventory (LIFO, still held by the subsidiary) is overvalued by $500, its plant assets (10-year life, straight-line) are overvalued by $6,000, and it has previously unreported intangibles valued at $2,000 (2-year life, straight-line). Goodwill from the acquisition is not impaired in the year of acquisition. In the year of acquisition, the subsidiary reports net income of $2,500. Using the complete equity method, in the year of acquisition, the parent reports equity in the net income of the subsidiary of: a. b. c. d.
$3,500 $2,100 $2,400 $2,900
ANS:
b $2,500 + ($6,000/10) – ($2,000/2) = $2,100.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-3
11.
12.
13.
14.
Topic: Complete equity method LO 1 At the date of acquisition, a subsidiary’s inventory (FIFO, sold in the year of acquisition) is overvalued by $500, its plant assets (10-year life, straight-line) are overvalued by $6,000, and it has previously unreported intangibles valued at $2,000 (2-year life, straight-line). Goodwill from the acquisition is not impaired. In the third year following acquisition, the subsidiary reports net income of $2,500. Using the complete equity method, in the third year following acquisition, the parent reports equity in the net income of the subsidiary of: a. b. c. d.
$1,900 $3,100 $1,500 $ 400
ANS:
b $2,500 + ($6,000/10) = $3,100.
Topic: Overview of consolidation in subsequent years LO 1 A subsidiary still holds all net assets that were revalued at the date of acquisition. Which working paper eliminating entry below is most likely to be the same whether the consolidation takes place at the date of acquisition or in subsequent years? a. b. c. d.
Write-off eliminating entry (O) adjustment to goodwill Equity eliminating entry (E) adjustment to retained earnings Equity eliminating entry (E) adjustment to capital stock Revaluation eliminating entry (R) adjustment to inventory
ANS:
c
Topic: Overview of consolidation in subsequent years LO 1 On consolidated financial statements, where does the parent’s equity in the net income of the subsidiary account appear? a. b. c. d.
On the consolidated income statement, as an deduction from income On the consolidated income statement, as a revenue On the consolidated balance sheet, as an equity Doesn’t appear on the consolidated financial statements
ANS:
d
Topic: Overview of consolidation in subsequent years LO 1 Consolidation eliminating entries (C), (E), (R), and (O) fully eliminate the parent’s Investment in Subsidiary account at what stage? a. b. c. d.
After eliminating entry (C) After eliminating entries (C) and (E) After eliminating entries (C), (E) and (R) After eliminating entries (C), (E), (R) and (O)
© Cambridge Business Publishers, 2023 4-4
Advanced Accounting, 5th Edition
ANS: 15.
c
Topic: Overview of consolidation in subsequent years LO 1 Consolidated retained earnings at the end of the year equals: a.
Beginning retained earnings of the parent plus beginning retained earnings of the subsidiary, plus consolidated net income less declared dividends of the parent and the subsidiary. Beginning retained earnings of the parent plus consolidated net income and consolidated other comprehensive income, less declared dividends of the parent and the subsidiary. Beginning retained earnings of the parent plus consolidated net income less declared dividends of the parent. Beginning retained earnings of the parent plus consolidated net income less declared dividends of the parent and the subsidiary.
b. c. d. ANS:
c
Use the following information to answer Questions 16 – 18. A subsidiary is acquired on January 1, 2023 for $10,000. The subsidiary’s book value at the date of acquisition was $2,000. Following is revaluation information for the subsidiary’s identifiable net assets at the date of acquisition: Inventories Identifiable intangibles
Fair Value – Book Value $ 200 5,000
FIFO, sold in 2023 Straight-line, 5 years
Goodwill recognized in the acquisition was unimpaired in 2023 but became fully impaired during 2024. The subsidiary did not declare any dividends during this period and reported no other comprehensive income. The subsidiary reported net income as follows: Year 2023 2024 2025
Net Income $1,500 5,000 2,000
The parent uses the complete equity method to report its investment on its own books. 16.
Topic: Complete equity method LO 1 Equity in net income for 2023, reported on the parent’s books, is: a. b. c. d.
$ 300 $ 500 $1,300 $1,500
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-5
ANS:
17.
a
Reported net income Inventory write-off Intangibles write-off Equity in net income
$5,000/5
Topic: Complete equity method LO 1 Equity in net income for 2024, reported on the parent’s books, is: a. b. c. d.
$1,000 $2,200 $1,200 $4,000
ANS:
c
Acquisition cost Book value Excess paid Revaluations: Inventory Identifiable intangibles Goodwill Reported net income Intangibles write-off Goodwill write-off Equity in net income
18.
$ 1,500 (200) (1,000) $ 300
$10,000 2,000 8,000 200 5,000
$5,000/5
(5,200) $ 2,800 $ 5,000 (1,000) (2,800) $ 1,200
Topic: Complete equity method LO 1 Equity in net income for 2025, reported on the parent’s books, is: a. b. c. d.
$1,150 $1,000 $ 850 $1,350
ANS:
b
Reported net income Intangibles write-off Equity in net income for 2021
© Cambridge Business Publishers, 2023 4-6
$5,000/5
$ 2,000 (1,000) $ 1,000
Advanced Accounting, 5th Edition
19.
20.
21.
Topic: Subsequent reporting for revaluations LO 2 At the date of acquisition, a subsidiary’s plant assets (20-year life, straight-line) have a fair value that is $8,000 above the subsidiary’s book value. At the end of the third year following acquisition, revaluation (R) debits plant assets, net of accumulated depreciation, by a. b. c. d.
$8,000 $7,200 $6,800 $7,600
ANS:
b $8,000 – (2 x ($8,000/20)) = $7,200
Topic: Subsequent reporting for revaluations LO 2 At the date of acquisition, a subsidiary’s plant assets (10-year life, straight-line) have a fair value of $60,000 and are carried on the subsidiary’s books at an original cost of $80,000 and accumulated depreciation of $30,000. In the third year following acquisition, write-off (O) increases (decreases) depreciation expense by a. b. c. d.
$(2,000) $ 6,000 $(6,000) $ 1,000
ANS:
d ($60,000 – ($80,000 - $30,000))/10 = $1,000 increase
Topic: Subsequent reporting for revaluations LO 2 At the date of acquisition, a subsidiary’s bonds payable are carried at a par value of $100,000 but have a fair value of $102,000. The bonds have a 5-year life, and any premium or discount is straight-line amortized. In the third year following acquisition, write-off (O) increases (decreases) interest expense by a. b. c. d.
$ (400) $ 400 $ (800) $ 1,200
ANS:
a $2,000/5 = $400 premium amortization reduces interest expense
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-7
22.
23.
Topic: Write-offs of identifiable intangibles LO 2 Which of the following previously unreported intangible assets is most likely to be classified as an indefinite life identifiable intangible asset at the date of acqquisition? a. b. c. d.
Favorable leaseholds Production backlog Customer lists In-process research & development
ANS:
d
Topic: Impairment testing of identifiable intangibles LO 2 Which statement is true regarding the U.S. GAAP impairment test for limited life intangibles? a.
d.
Even if the fair value of the intangible is less than its book value, it is possible that no impairment loss will be reported. No impairment testing is necessary if it is more likely than not that the intangibles are not impaired. Impairment loss always equals the difference between book and fair value of the intangibles, if book value exceeds fair value. The impairment loss is calculated as the difference between fair value and original cost.
ANS:
a
b. c.
24.
Topic: Impairment of identifiable intangibles, first year following acquisition LO 2 Previously unreported identifiable intangible assets with a fair value of $100 million and a 4-year life were recognized in an acquisition. At the end of the first year following acquisition, impairment testing reveals that total expected undiscounted future cash inflows for the intangible assets are $78 million, and total expected discounted future cash inflows are $72 million. What is the impairment loss for the identifiable intangible assets for the year? a. b. c. d.
$ 3 million $22 million $28 million None
ANS:
d Book value, end of year = $100 – ($100/4) = $75 million. $75 million < $78 million, so no impairment is recognized.
© Cambridge Business Publishers, 2023 4-8
Advanced Accounting, 5th Edition
25.
Topic: Impairment of identifiable intangibles, subsequent years LO 2 Identifiable intangible assets with a fair value of $72 million and a 6-year life were recognized in an acquisition. The intangible assets were not impaired in the first three years following acquisition. It is now four years since acquisition. Impairment testing reveals that total expected undiscounted future cash inflows for the intangible assets are $22 million, and total expected discounted future cash inflows are $18 million. What is the impairment loss for the intangible assets for the year? a. b. c. d.
$50 million $ 6 million $ 2 million None
ANS:
b Book value, end of fourth year = $72 – ($72/6 x 4) = $24 million. $24 million > $22 million, so the impairment loss is ($24 million - $18 million) = $6 million.
Use the following information to answer Questions 26 and 27: A subsidiary’s bonds payable (five-year remaining life) are undervalued by $5,000 at the date of acquisition. The premium/discount is straight-line amortized, and premium/discount amortization directly adjusts bonds payable. 26.
27.
Topic: Revaluation write-offs in subsequent years LO 2, 4 On the consolidation working paper prepared at the end of the second year following acquisition, eliminating entry (R) includes: a. b. c. d.
A credit to interest expense of $1,000. A debit to interest expense of $1,000. A debit to bonds payable of $5,000. A credit to bonds payable of $4,000.
ANS:
d $4,000 = $5,000 – (($5,000)/5) x 1)
Topic: Revaluation write-offs in subsequent years LO 2 On the consolidation working paper prepared at the end of the fourth year following acquisition, eliminating entry (O) includes: a. b. c. d.
A credit to interest expense of $1,000. A credit to bonds payable of $1,000. A debit to bonds payable of $2,000. A credit to bonds payable of $2,000.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-9
ANS:
a Eliminating entry (O) is: Bonds payable
1,000 Interest expense
1,000
$1,000 = $5,000/5. 28.
29.
30.
Topic: Revaluation write-offs LO 2 A parent acquires all of a subsidiary’s voting stock. At the date of acquisition, the fair value of the subsidiary’s long-term debt is $100 greater than its book value. The debt has a 5-year remaining life at the date of acquisition. When consolidating the subsidiary’s financial statements for the first year following acquisition, how will eliminating entry (O) affect long-term debt and interest expense? a. b. c. d.
$80 debit to long-term debt, $80 credit to interest expense $20 debit to long-term debt, $20 credit to interest expense $80 credit to long-term debt, $80 debit to interest expense $20 credit to long-term debt, $20 debit to interest expense
ANS:
b
Topic: Revaluation write-offs, long-term debt LO 3 The interest rate at which an acquired company issued its long-term bonds payable is higher than the current market rate. The bonds have a four-year remaining life at the date of acquisition. Which statement is true concerning the write-off of revaluation of these bonds in the fourth year after acquisition (eliminating entry O)? a. b. c. d.
Interest expense will increase Bonds payable will increase Interest expense will decrease No eliminating entry (O) is needed
ANS:
c
Topic: Revaluation write-offs, long-term debt LO 3 A parent acquired all of the stock of a subsidiary. The subsidiary had originally issued long-term debt when the market rate of interest was 3%. The market rate of interest for the debt at the date of acquisition was 5%. How does the change in market interest rate affect the consolidated financial statements? a. b. c. d.
Goodwill is lower. Acquired long-term debt is valued at a higher amount. Future interest expense is lower. There is no effect on consolidated account balances.
ANS:
a
© Cambridge Business Publishers, 2023 4-10
Advanced Accounting, 5th Edition
31.
Topic: Impairment testing for identifiable intangibles LO 2 Which statement is true concerning impairment testing of identifiable intangible assets, following U.S. GAAP? a.
c. d.
For limited life intangibles, the impairment loss is the difference between the sum of undiscounted expected cash flows and book value. If the sum of undiscounted expected cash flows is less than book value, the impairment loss calculation for limited life intangibles is the same as for indefinite life intangibles. A qualitative test may be used for limited life intangibles but not indefinite life intangibles. A qualitative test may be used for both limited life and indefinite life intangibles.
ANS:
b
b.
32.
33.
Topic: Impairment testing of intangibles revaluations LO 2, 3 The U.S. GAAP option to use a qualitative assessment for impairment testing applies to: a. b. c. d.
Limited life intangibles only Limited life and indefinite life intangibles and goodwill Indefinite life intangibles and goodwill Goodwill only
ANS:
c
Topic: Goodwill impairment testing LO 3 Which statement below is most likely to be false concerning the qualitative assessment for goodwill impairment? a. b. c. d. ANS:
34.
The assessment allows entities to avoid the cost of impairment testing when it is likely that no impairment would be identified through quantitative tests. The assessment results in fewer earnings manipulations regarding impairment recognition. The less time that has passed between the last fair value measurement and the current testing date, the easier it is to make a qualitative assessment of impairment. If it is determined that there is a 45% chance the goodwill is impaired, no quantitative testing is required. b
Topic: Goodwill impairment testing LO 3 The major justification for adding a qualitative test to the U.S. GAAP impairment test for goodwill is that it: a. b. c. d.
Enhances the accuracy of the estimated impairment loss Results in more timely recognition of impairment losses Saves money spent estimating fair values Reduces the fee paid to outside auditors
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-11
ANS: 35.
Topic: Goodwill impairment testing LO 3 Which statement is true concerning U.S. GAAP for the qualitative evaluation of goodwill? a. b. c. d. ANS:
36.
37.
c
You don’t have to quantitively evaluate goodwill for impairment if it is more likely than not that the reporting unit’s book value is less than its fair value. You don’t have to quantitatively evaluate goodwill for impairment if it is more likely than not that the reporting unit’s fair value is less than its book value. You don’t have to quantitatively evaluate goodwill for impairment if the acquired subsidiary is expected to continue operating in the foreseeable future. The qualitative goodwill evaluation is based on general information on the economy, rather than specific information about the reporting unit’s performance. a
Topic: Goodwill impairment testing LO 3 Assume a U.S. company decides to quantitatively test its goodwill for impairment. A division’s book value exceeds its fair value by $8 million, and its goodwill has a book value of $10 million. The division’s goodwill impairment loss is a. b. c. d.
$10 million. $0 $8 million. $2 million.
ANS:
c
Topic: Goodwill impairment testing LO 3 Assume a U.S. company decides to quantitatively test its goodwill for impairment. A division’s book value exceeds its fair value by $12 million, and its goodwill has a book value of $10 million. The division’s goodwill impairment loss is a. b. c. d.
$0 $10 million. $2 million. $12 million.
ANS:
b
© Cambridge Business Publishers, 2023 4-12
Advanced Accounting, 5th Edition
38.
Topic: Goodwill impairment LO 3 A company reports $11.2 million in goodwill and decides to quantitatively test it for impairment at the end of year. The following information is collected:
Book value of goodwill Fair value of division Book value of division
Division 1 $ 7,000,000 40,000,000 45,000,000
Division 2 $ 200,000 6,000,000 6,500,000
Division 3 $ 4,000,000 20,000,000 21,000,000
What is the amount of goodwill impairment loss for the year? a. b. c. d.
$ 6,200,000 $11,200,000 $ 6,500,000 $ 6,000,000
ANS:
a Fair value of division Book value of division Possible goodwill impairment Exceeds book value of goodwill? Goodwill impairment loss
39.
Division 1 $ 40,000,000 45,000,000 5,000,000 No $5,000,000
Division 2 $ 6,000,000 6,500,000 500,000 Yes $ 200,000
Division 3 $ 20,000,000 21,000,000 1,000,000 No $ 1,000,000
Topic: Goodwill impairment LO 3 A U.S. company reports $11,600 in goodwill and decides to quantitatively test it for impairment at the end of the year. The following information is collected:
Book value of goodwill Fair value of division Book value of division
Division 1 $ 5,000 65,000 62,000
Division 2 $ 1,000 9,000 9,500
Division 3 $ 6,200 30,000 29,000
What is the amount of goodwill impairment loss for the year? a. b. c. d.
$ 500 $ 3,500 $ 1,500 $ 4,000
ANS:
a Fair value of division Book value of division Possible goodwill impairment Exceeds book value of goodwill? Goodwill impairment loss
Test Bank, Chapter 4
Division 1 $ 65,000 62,000 None N/A $ 0
Division 2 $9,000 9,500 $ 500 No $ 500
Division 3 $ 30,000 29,000 None N/A $ 0
© Cambridge Business Publishers, 2023 4-13
40.
Topic: Goodwill impairment LO 3 A merger generates goodwill of $50,000,000, which is properly allocated to three divisions of the organization. At the end of the first year following acquisition, the following information is available:
Beginning balance of goodwill Fair value of division Book value of division
Division 1 $ 30,000,000 65,000,000 70,000,000
Division 2 $ 15,000,000 44,000,000 43,000,000
Division 3 $ 5,000,000 15,000,000 17,000,000
Due to a downturn in the economy during the year, it is more likely than not that goodwill is impaired in all three divisions. What is the amount of goodwill impairment loss for the year? a. b. c. d.
$ 8,000,000 $ 5,000,000 $ 2,000,000 $ 7,000,000
ANS:
d Fair value of division Book value of division Possible goodwill impairment Exceeds book value of goodwill? Goodwill impairment loss
41.
42.
Division 1 $ 65,000,000 70,000,000 5,000,000 No $ 5,000,000
Division 2 $44,000,000 43,000,000 None N/A $ 0
Division 3 $ 15,000,000 17,000,000 2,000,000 No $ 2,000,000
Topic: Goodwill impairment LO 3 Following U.S. GAAP, goodwill acquired in a merger must be allocated to business units before it can be tested for impairment. How are these “business units” defined? a. b. c. d.
The choice of business units is at the discretion of management. The business units are defined geographically. The business units are defined by product line. The business units are the reportable units used for segment reporting.
ANS:
d
Topic: Goodwill impairment LO 3 An impairment test results in a division’s estimated goodwill impairment that is an amount greater than the carrying value of its goodwill. Which statement is most likely to be true? a. b. c. d.
No goodwill impairment is recognized. The division’s identifiable net assets are impaired. It is more likely than not that the goodwill is not impaired. Goodwill originally allocated to the division was overstated.
ANS:
b
© Cambridge Business Publishers, 2023 4-14
Advanced Accounting, 5th Edition
43.
44.
45.
Topic: Consolidation in subsequent years LO 4 A subsidiary has plant assets with a fair value of $80 million and book value of $50 million at the date of acquisition. The plant assets have a remaining life, as of the date of acquisition, of 15 years, straight-line. You are consolidating the accounts at the end of the third year since acquisition, and the subsidiary still owns the plant assets. The amount by which the plant assets are revalued in eliminating entry (R) is: a. b. c. d.
$26 million $30 million $24 million $28 million
ANS:
a Entry (R) recognizes revaluation as of the beginning of the third year. Total revaluation was $80 million - $50 million = $30 million, and the revaluation declines by $30 million/15 = $2 million each year. $30 million – (2 x $2 million) = $26 million.
Topic: Consolidation in subsequent years LO 4 A subsidiary has previously unreported brand names valued at $50 million at the date of acquisition. The brand names have an indefinite life. It is now the end of the second year since acquisition, and you are consolidating the accounts. The subsidiary still owns the brand names. Impairment testing reveals that the brand names were impaired by $5 million in the first year and $7 million in the second year. The amount by which the brand names are recognized in eliminating entry (R) is: a. b. c. d.
$50 million $38 million $45 million None since the brand names have an indefinite life
ANS:
c Entry (R) recognizes revaluation as of the beginning of the second year. $50 million - $5 million = $45 million.
Topic: Consolidation in subsequent years LO 4 At the date of acquisition, a subsidiary’s assets and liabilities are reported at amounts approximating fair value, except it has previously unreported identifiable intangibles of $30 million (5-year life, straight-line), and its plant assets are overvalued by $70 million (10-year life, straight-line). Revaluation write-offs are reported as adjustments to operating expenses. Eliminating entry (O) at the end of the second year following acquisition: a. b. c. d.
Increases operating expenses by $6 million. Reduces operating expenses by $1 million. Increases operating expenses by $13 million. Increases operating expenses by $1 million.
ANS:
b ($30 million/5) – ($70 million/10) = $1 million decrease in operating expenses
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-15
46.
Topic: Consolidation in subsequent years LO 1, 4 A wholly-owned subsidiary reports income of $5 million, other comprehensive income of $100,000, and dividends of $1 million. There are no revaluation write-offs. Eliminating entry (C) reduces Investment in Subsidiary by: a. b. c. d.
$4,100,000. $4,000,000. $5,100,000. $5,000,000.
ANS:
a Eliminating entry (C) is as follows: Equity in NI of subsidiary Equity in OCI of subsidiary
5,000,000 100,000 Dividends Investment in subsidiary
47.
Topic: Consolidation in subsequent years LO 1, 4 A wholly-owned subsidiary reports a loss of $2 million on its income statement, and an other comprehensive gain of $100,000. The subsidiary’s revalued net assets consist of indefinite life identifiable intangible assets. Impairment testing for the year reveals $250,000 in impairment on these intangibles. The subsidiary did not declare any dividends. The parent uses the complete equity method to report its investment in the subsidiary on its own books. Eliminating entry (C) had what effect on the Investment in Subsidiary account? a. b. c. d.
$1,650,000 increase $2,150,000 decrease $1,650,000 decrease $2,150,000 increase
ANS:
b Eliminating entry (C) is as follows: Equity in OCI of subsidiary Investment in subsidiary
100,000 2,150,000 Equity in NL of subsidiary
48.
1,000,000 4,100,000
2,250,000
Topic: Consolidation in subsequent years LO 1, 4 A wholly-owned subsidiary reports income of $600,000 and an other comprehensive loss of $50,000. The subsidiary’s revalued net assets consist of indefinite life identifiable intangible assets, which are not impaired this year. The subsidiary declared dividends of $200,000 during the year. Eliminating entry (C) reduces Investment in Subsidiary by: a. b. c. d.
$450,000 $350,000 $600,000 $400,000
© Cambridge Business Publishers, 2023 4-16
Advanced Accounting, 5th Edition
ANS:
b Eliminating entry (C) is as follows: Equity in NI of subsidiary
600,000 Equity in OCL of subsidiary Dividends Investment in subsidiary
49.
50.
50,000 200,000 350,000
Topic: Consolidation in subsequent years LO 4 A wholly-owned subsidiary’s revalued net assets at the date of acquisition consist of indefinite life identifiable intangible assets valued at $500,000 at the date of acquisition. Impairment of these intangibles as of the beginning of the current year is $10,000, and impairment testing for the current year reveals $100,000 in additional impairment on these intangibles. Consolidation eliminating entry (O) at the end of the current year reduces identifiable intangible assets by: a. b. c. d.
$500,000. $ 10,000. $110,000. $100,000.
ANS:
d
Topic: Consolidation in subsequent years LO 4 A wholly-owned subsidiary’s plant assets have a book value of $40 million and a fair value of $35 million at the date of acquisition. The plant assets have a remaining life at the date of acquisition of 10 years, straight-line. It is now three years since the acquisition. Assume an accumulated depreciation account is not used, i.e. all adjustments are made directly to the net plant assets account. Consolidation eliminating entry (R) at the end of the current year has what effect on the net plant assets account? a. b. c. d.
Increase of $4,000,000. Decrease of $4,000,000. Increase of $3,500,000. Decrease of $3,500,000.
ANS:
b The original revaluation reduced plant assets by $5,000,000. In the third year, the revaluation at the beginning of the year reduces plant assets by: $5,000,000 – (($5,000,000/10) x 2) = $4,000,000.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-17
51.
52.
Topic: Consolidation in subsequent years LO 4 A parent company acquires a subsidiary on January 1, 2022. The subsidiary’s equipment (6-year remaining life, straight-line) is undervalued by $30 million at the date of acquisition. On the consolidation working paper prepared at December 31, 2027 (6 years later), by how much does eliminating entry (R) increase the equipment account? a. b. c. d.
$ 5 million $30 million $10 million $0
ANS:
a Eliminating entry (R) recognizes the revaluation to fair value as of the beginning of the sixth year. $30 – [($30/6) x 5] = $5 million increase to the equipment account.
Topic: Consolidation in subsequent years LO 4 A parent company acquires a subsidiary on January 1, 2022. The subsidiary’s equipment (6-year remaining life, straight-line) is undervalued by $30 million at the date of acquisition. On the consolidation working paper prepared at December 31, 2027 (6 years later), what is the net effect of eliminating entries (R) and (O) on the equipment account? a. b. c. d.
$ 5 million increase $30 million increase $10 million increase $0
ANS:
d
Use the information below to answer questions 53 and 54. A parent acquired previously unreported intangible assets in an acquisition, consisting of developed technology with a fair value of $25,000, and $150,000 in goodwill. The developed technology has a 5year life, straight-line. Both are allocated to the Communications reporting unit. At the end of the first year following the acquisition, the following information is available: Sum of expected future undiscounted cash flows, developed technology Sum of expected future discounted cash flows, developed technology Fair value of Communications reporting unit Book value of Communications reporting unit, before any intangibles write-offs 53.
$ 18,000 12,000 500,000 550,000
Topic: Intangibles write-offs LO 2, 3 On the consolidation working paper, in eliminating entry (O), what is the total write-off for developed technology? a. b. c. d.
$ 5,000 $ 7,000 $13,000 $20,000
© Cambridge Business Publishers, 2023 4-18
Advanced Accounting, 5th Edition
ANS:
54.
55.
Topic: Goodwill impairment LO 3 What is the amount of goodwill impairment for the year? a. b. c. d.
$35,000 $45,000 $50,000 $37,000
ANS:
d Book value of reporting unit = $550,000 - $13,000 = $537,000 Fair value of reporting unit = $500,000
Topic: Consolidation eliminations LO 4 An acquisition requires revaluation of a subsidiary’s date-of-acquisition inventory from a book value of $5 million to fair value of $3 million. The subsidiary uses FIFO and sells the inventory in the first year following acquisition. Which statement is true concerning the consolidation eliminating entries for this revaluation? a.
d.
Each year following acquisition, entry (R) reduces inventory and entry (O) increases cost of goods sold by $2 million. After the first year, entry (R) reduces inventory by $2 million, but entry (O) is not required. No entry (R) is required after the first year, but eliminating entry (O) reduces cost of goods sold by $2 million in the first year. No entries are required in any year.
ANS:
c
b. c.
56.
c Amortization = $25,000/5 = $5,000 Step one of the impairment test: ($25,000 - $5,000) > $18,000; Therefore impairment is $20,000 - $12,000 = $8,000; $5,000 + $8,000 = $13,000.
Topic: Consolidation eliminations LO 4 An acquisition requires revaluation of a subsidiary’s date-of-acquisition inventory from a book value of $5 million to fair value of $2 million. The subsidiary uses LIFO and inventory purchases exceed sales in every year following acquisition. Which statement is true concerning the consolidation eliminating entries for this revaluation? a.
d.
Each year following acquisition, entry (R) reduces inventory and entry (O) increases cost of goods sold by $3 million. Each year following acquisition, entry (R) reduces inventory by $3 million, but entry (O) is not required. No entry (R) is required after the first year, but eliminating entry (O) reduces cost of goods sold by $3 million in the first year. No entries are required in any year.
ANS:
b
b. c.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-19
57.
Topic: Consolidation eliminations LO 4 An acquisition requires revaluation of a subsidiary’s date-of-acquisition plant assets from a book value of $40 million to a fair value of $25 million. The plant assets have a 10-year remaining life at the date of acquisition. Which statement is true concerning the eliminating entries for this revaluation? a. b. c. d. ANS:
58.
59.
In the second year following acquisition, eliminating entry (O) reduces depreciation expense by $1.5 million. In the third year following acquisition, eliminating entry (R) increases plant assets by $3 million. In the first year following acquisition, the net effect of eliminating entries (R) and (O) is to reduce plant assets by $15 million. In the second year following acquisition, eliminating entry (R) reduces plant assets by $3 million. a
Topic: Consolidation eliminations LO 4 Mojo Corporation acquires all the voting stock of Ninja Company. Ninja has $1,000,000 in bonds payable, issued at par value, on its books. The bonds have a 5-year remaining life at the date of acquisition, and 4% interest is paid annually. The fair value of the bonds at the date of acquisition is $1,010,000. The premium is straight-line amortized. Which statement is true concerning the consolidation of Mojo with Ninja two years after the acquisition? a. b. c. d.
Consolidated interest expense on the bonds is $42,000. Eliminating entry (R) increases bonds payable by $6,000. If market interest rates are 4% at the date of consolidation, no entry (O) is needed. Eliminating entry (O) decreases interest expense by $2,000.
ANS:
d
Topic: Revaluation write-offs LO 4 A parent company acquires all of a subsidiary’s voting stock at the beginning of 2022. At the date of acquisition, the subsidiary’s equipment had a book value of $40 million and a fair value of $25 million. The equipment had a 10-year remaining life, straight-line. Consolidation eliminating entry (R), on the consolidation working paper for 2025, reduces the net equipment account by what amount? a. b. c. d.
$10.5 million $15.0 million $ 9.0 million $17.5 million
ANS:
a $15 million – [($15 million/10) x 3] = $10.5 million.
© Cambridge Business Publishers, 2023 4-20
Advanced Accounting, 5th Edition
60.
Topic: Revaluation write-offs LO 2, 4 A parent company acquires all of a subsidiary’s voting stock at the beginning of 2022. At the date of acquisition, the subsidiary’s equipment’s fair value was $20 million below book value. The equipment had a 10-year remaining life, straight-line. Consolidation eliminating entry (O), on the consolidation working paper for 2025, has what effect on consolidated depreciation expense? a. b. c. d.
Debit for $2 million Debit for $8 million Credit for $2 million Credit for $8 million
ANS:
c $20 million/10 = $2 million credit to depreciation expense.
Use the following information to answer Questions 61 – 66. On January 1, 2022, Pearson Company acquired all of Sundisk Company’s voting stock for $20,000 in cash. Sundisk’s total shareholders’ equity at January 1, 2022 was $5,000. Some of Sundisk’s assets and liabilities at the date of acquisition had fair values that were different from reported values, as follows: Plant assets, net (10 years, straight-line) Identifiable intangibles (indefinite life)
Book Value $15,000 0
Fair Value $ 10,000 9,000
It is now December 31, 2024 (3 years later). Impairment of recognized identifiable intangibles through the end of 2023 totals $400, and there is no impairment in 2024. There is no goodwill impairment as of the beginning of 2024, but goodwill impairment for 2024 is $1,200. Pearson uses the complete equity method to account for its investment. December 31, 2024 trial balances for Pearson and Sundisk follow:
Current assets Plant assets, net Identifiable intangibles Investment in Sundisk Goodwill Liabilities Capital stock Retained earnings, beginning Sales revenue Equity in net income of Sundisk Cost of goods sold Operating expenses
Pearson Dr (Cr) $ 5,000 28,700 – 28,400 – (20,300) (15,000) (25,000) (25,000) (800) 20,000 4,000 $ 0
Sundisk Dr (Cr) $ 2,500 22,000 – – – (11,000) (2,000) (10,000) (14,000) – 9,000 3,500 $ 0
The following questions relate to consolidation eliminating entries for 2024.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-21
61.
62.
Topic: Consolidation eliminating entries LO 4 Eliminating entry (R) debits goodwill in the amount of: a. b. c. d.
$1,000 $11,000 $10,000 $15,000
ANS:
b Original goodwill = $20,000 - $5,000 - $9,000 + $5,000 = $11,000. There has been no impairment as of the beginning of 2024.
Topic: Consolidation eliminating entries LO 4 Eliminating entry (C) credits Investment in Sundisk in the amount of: a. b. c. d.
$800 $100 $300 $200
ANS:
a Eliminating entry (C) is: Equity in NI of Sundisk
800 Investment in Sundisk
63.
Topic: Consolidation eliminating entries LO 4 Eliminating entry (E) credits Investment in Sundisk in the amount of: a. b. c. d.
$ 2,000 $25,900 $12,000 $13,500
ANS:
c Eliminating entry (E) is: Capital stock Retained earnings, beginning
2,000 10,000 Investment in Sundisk
64.
800
12,000
Topic: Consolidation eliminating entries LO 4 Eliminating entry (R): a. b. c. d.
Credits plant assets, net $4,000 Debits plant assets, net $5,000 Debits intangibles $8,000 Debits intangibles $9,000
© Cambridge Business Publishers, 2023 4-22
Advanced Accounting, 5th Edition
ANS:
a Eliminating entry (R) is: Intangibles Goodwill
8,600 11,000 Plant assets, net Investment in Sundisk
65.
4,000 15,600
Topic: Consolidation eliminating entries LO 4 Eliminating entry (O) debits operating expenses for a total of: a. b. c. d.
$1,200 $400 $100 $700
ANS:
d Eliminating entry (O) is: Plant assets, net Operating expenses
500 700 Goodwill
66.
1,200
Topic: Consolidation eliminating entries, subsequent year, cost method LO 6 Now assume Pearson uses the cost method to account for its investment in Sundisk. You are doing consolidation eliminating entries at December 31, 2024. Before doing eliminating entries (C), (E), (R), (O), in eliminating entry (A) you must increase Pearson’s Investment in Sundisk by: a. b. c. d.
$7,000 $5,600 $7,600 $8,000
ANS:
c
Sundisk’s total equity, January 1, 2024 Sundisk’s total equity, date of acquisition Increase in Sundisk’s retained earnings Cumulative write-offs of revaluations to January 1, 2024 Plant assets $5,000/10 x 2 Identifiable intangibles Amount of adjustment (A) to Investment in Sundisk
Test Bank, Chapter 4
$12,000 (5,000) 7,000 1,000 (400) $ 7,600
© Cambridge Business Publishers, 2023 4-23
Use the following information to answer Questions 67 – 71 below. Potash Corporation acquired the voting stock of Safestyle Company on January 1, 2023 for $40 million. Safestyle’s book value at the time was $10 million, consisting of $2 million of capital stock and $8 million of retained earnings. The $30 million difference between fair and book value was attributed to goodwill. It is now December 31, 2024, the end of the accounting year and two years after the acquisition. Safestyle’s January 1, 2024 retained earnings balance is $10 million, and it reports net income of $1.5 million for 2024. Safestyle declares no dividends and has no other comprehensive income. Goodwill from the acquisition was not impaired in 2023 but is impaired by $100,000 in 2024. Potash uses the complete equity method to report its investment in Safestyle on its own books. 67.
68.
Topic: Complete equity method LO 1 What is 2024 equity in net income of Safestyle, reported on Potash’s books? a. b. c. d.
$1,500,000 $1,600,000 $1,400,000 $1,700,000
ANS:
c $1,500,000 - $100,000 = $1,400,000
Topic: Complete equity method LO 1 What is the December 31, 2024 balance for Investment in Safestyle, reported on Potash’s books? a. b. c. d.
$40,000,000 $42,000,000 $41,400,000 $43,400,000
ANS:
d Investment, January 1, 2023 Change in retained earnings to January 1, 2024 Investment, January 1, 2024 Equity in NI, 2024 Investment, December 31, 2024
69.
$40,000,000 2,000,000 42,000,000 1,400,000 $43,400,000
Topic: Consolidation eliminating entries LO 4 On the December 31, 2024 consolidation working paper, eliminating entry (E) credits the Investment in Safestyle account by: a. b. c. d.
$12,000,000 $10,000,000 $ 8,000,000 $13,500,000
© Cambridge Business Publishers, 2023 4-24
Advanced Accounting, 5th Edition
ANS:
a Eliminating entry (E) is: Capital stock Retained earnings, beginning
2,000,000 10,000,000 Investment in Safestyle
70.
Topic: Consolidation eliminating entries LO 4 On the December 31, 2024 consolidation working paper, eliminating entry (R) credits the Investment in Safestyle account by: a. b. c. d.
$30,100,000 $30,000,000 $29,900,000 $28,500,000
ANS:
b Eliminating entry (R) is: Goodwill
30,000,000 Investment in Safestyle
71.
12,000,000
30,000,000
Topic: Consolidation eliminating entries LO 4 On the December 31, 2024 consolidation working paper, eliminating entry (O) debits goodwill impairment loss by: a. b. c. d.
$ 100,000 $29,900,000 $ 1,500,000 $ 1,400,000
ANS:
a
Use the following information to answer Questions 72 – 78. Park Corporation acquired the voting stock of Sequoia Company on January 1, 2024 for $25 million in cash and stock. At the date of acquisition, Sequoia’s book value totaled $3 million, consisting of $1.6 million in capital stock, $1.8 million in retained earnings, and $400,000 in accumulated other comprehensive losses. Sequoia’s reported net assets at the date of acquisition were carried at amounts approximating fair value, except its inventory was overvalued by $500,000 (sold in 2024), its plant assets (10-year life, straight-line) were overvalued by $3,500,000, and its long-term debt (premium amortized over 10 years, straight-line) is undervalued by $100,000. Sequoia also had previously unreported identifiable intangibles (5-year life, straight-line) valued at $5,000,000. It is now December 31, 2024. Sequoia reports net income of $1,200,000 and other comprehensive income of $50,000 for 2024 and declares and pays dividends of $200,000. None of the revaluations are impaired in 2024. Park uses the complete equity method to account for its investment.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-25
72.
Topic: Complete equity method LO 1 What is 2024 equity in net income of Sequoia, reported on Park’s books?
73.
a. b. c. d.
$1,040,000 $ 560,000 $1,200,000 $1,060,000
ANS:
d Sequioa’s reported income Cost of goods sold adjustment Depreciation expense adjustment Amortization expense Interest expense adjustment Equity in net income
Topic: Complete equity method LO 1 What is the December 31, 2024 balance for Investment in Sequoia, reported on Park’s books? a. b. c. d.
$26,060,000 $25,860,000 $25,910,000 $26,000,000 ANS:
c Beginning investment balance + Equity in NI + Equity in OCI - Dividends Ending investment balance
74.
$ 1,200,000 500,000 350,000 (1,000,000) 10,000 $ 1,060,000
$25,000,000 1,060,000 50,000 (200,000) $25,910,000
Topic: Consolidation eliminating entries LO 4 Eliminating entry (E) credits Investment in Sequoia by: a. b. c. d.
$3,600,000 $3,000,000 $3,300,000 $1,500,000
ANS:
b Eliminating entry (E) is: Capital stock Retained earnings, beginning
1,600,000 1,800,000 AOCL Investment in Sequoia
© Cambridge Business Publishers, 2023 4-26
400,000 3,000,000
Advanced Accounting, 5th Edition
75.
76.
77.
Topic: Consolidation eliminating entries LO 4 Eliminating entry (R) debits goodwill in the amount of: a. b. c. d.
$21,100,000 $20,900,000 $20,100,000 $19,100,000
ANS:
a Investment Book value Excess paid Revaluations Inventory Plant assets Identifiable intangibles Long-term debt Goodwill
$25,000,000 3,000,000 22,000,000 (500,000) (3,500,000) 5,000,000 (100,000)
900,000 $21,100,000
Topic: Consolidation eliminating entries LO 4 How does eliminating entry (O) change consolidated cost of goods sold? a. b. c. d.
$500,000 debit $500,000 credit $100,000 credit No effect
ANS:
b
Topic: Consolidated balances in subsequent years LO 4 The balance for acquired identifiable intangibles on the December 31, 2024 consolidated balance sheet is: a. b. c. d.
$4,000,000 $5,000,000 $4,500,000 $1,000,000
ANS:
a $5,000,000 – (($5,000,000/5) x 1) = $4,000,000
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-27
78.
79.
Topic: Consolidated balances in subsequent years LO 4 Park’s beginning balance of accumulated other comprehensive income is $175,000, and it reports $250,000 in other comprehensive income for 2024 on its own books. The balance for accumulated other comprehensive income on the December 31, 2024 consolidated balance sheet is: a. b. c. d.
$425,000 $ 25,000 $475,000 $825,000
ANS:
c $175,000 + $250,000 + $50,000 = $475,000
Topic: Impairment of identifiable intangibles, IFRS and U.S. GAAP LO 2, 5 Identifiable intangible assets with a fair value of $100 million and a 5-year life were recognized in an acquisition occurring on June 30, 2023, the end of the accounting year. The intangible assets were not impaired in fiscal 2024. It is now June 30, 2025. Impairment testing reveals that total expected undiscounted future cash inflows for the intangible assets are $65 million, and total expected discounted future cash inflows are $35 million. What is the impairment loss for the intangible assets for fiscal 2025, following IFRS and following U.S. GAAP? a. b. c. d. ANS:
80.
IFRS $25 million $10 million $25 million $0
U.S. GAAP $0 $65 million $25 million $0
a Book value, end of fiscal 2025 = $100 – ($100/5 x 2) = $60 million. IFRS: $60 million - $35 million = $25 million. U.S. GAAP: $65 million > $60 million, so no impairment
Topic: Identifiable intangibles impairment, U.S. GAAP and IFRS LO 2, 5 Which statement is true regarding a comparison of the U.S. GAAP versus the IFRS impairment test for identifiable intangibles? a. b. c. d.
Impairment loss for limited life intangibles is generally higher for U.S. GAAP than for IFRS. Impairment loss for indefinite life intangibles is generally the same for IFRS and U.S. GAAP. Impairment loss for limited life intangibles is generally the same for IFRS and U.S. GAAP. Impairment loss for indefinite life intangibles is generally higher for IFRS than for U.S. GAAP.
ANS:
b
© Cambridge Business Publishers, 2023 4-28
Advanced Accounting, 5th Edition
81.
82.
83.
Topic: Intangibles reporting, IFRS LO 5 A company uses IFRS and chooses to report certain generic intangible assets at fair value. On January 1, 2023, it acquires software for €100,000, with an estimated life of 5 years, straight-line. On December 31, 2023, the intangible has a fair value of €110,000. How is this change in value reported on the 2023 financial statements? a. b. c. d.
Other comprehensive gain, €10,000 Other comprehensive gain, €30,000 Gain on the income statement, €30,000 Not reported
ANS:
b Book value at the end of 2023 = €100,000 – (€100,000/5) = €80,000. €110,000 - €80,000 = €30,000 gain, reported in OCI.
Topic: Intangibles reporting, IFRS LO 5 A company follows IFRS and chooses to report certain generic intangible assets at fair value. On January 1, 2023, it acquires software for €300,000. Estimated life is 3 years, straight-line. On December 31, 2023, the intangible has a fair value of €330,000. How is this change in value reported on the 2023 financial statements? a. b. c. d.
Other comprehensive gain, €30,000 Gain on the income statement, €30,000 Other comprehensive gain, €130,000 Gain on the income statement, €130,000
ANS:
c Book value at the end of 2023 = €300,000 – (€300,000/3) = €200,000. €330,000 - €200,000 = €130,000 gain, reported in OCI.
Topic: Intangibles reporting, IFRS LO 5 A company follows IFRS and chooses to report certain intangible assets at fair value. On January 1, 2023, it acquires software for €600,000. Estimated life is 5 years, straight-line. On December 31, 2023, the intangible has a fair value of €500,000. On December 31, 2024, its fair value is €390,000. How is this information reported on the 2024 financial statements? a. b. c. d.
Amortization expense €120,000; other comprehensive gain €30,000 Amortization expense €120,000; other comprehensive gain €140,000 Amortization expense €125,000; other comprehensive gain €20,000 Amortization expense €125,000; other comprehensive gain €15,000
ANS:
d Book value at the end of 2023 = €600,000 – (€600,000/5) = €480,000; €500,000 - €480,000 = €20,000 gain, reported in OCI. Amortization expense for 2024 = €500,000/4 = €125,000; book value at the end of 2024 = €500,000 – €125,000 = €375,000; €390,000 - €375,000 = €15,000 gain, reported in OCI.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-29
84.
Topic: Intangibles reporting, IFRS LO 5 Which statement is false concerning IFRS for intangibles? a. b.
d.
Intangibles may be marked to market only if they are traded in an active market. Increases in market value of intangibles reported using the revaluation model are reported in other comprehensive income. Amortization expense on intangibles reported using the revaluation model is reported in income. Goodwill may be marked to market if the acquisition occurred in an active market.
ANS:
d
c.
85.
Topic: Goodwill impairment, IFRS LO 5 An IFRS company reports $11,600 in goodwill and tests it for impairment at the end of the year. The following information is collected:
Book value of goodwill Fair value of division Book value of division
CGU 1 $ 5,000 60,000 62,000
CGU 2 $ 400 10,000 9,500
CGU 3 $ 2,200 5,000 2,000
CGU 4 $4,000 20,000 22,000
What is the amount of goodwill impairment loss for the year, following IFRS? a. $5,000 b. $2,000 c. $4,000 d. $7,500 ANS:
c Fair value of division Book value of division Goodwill impairment loss
86.
CGU 1 $60,000 62,000 $ 2,000
CGU 2 $10,000 9,500 $ 0
CGU 3 $5,000 2,000 $ 0
CGU 4 $20,000 22,000 $ 2,000
Topic: Goodwill impairment, IFRS LO 5 An IFRS company reports $25,000 in goodwill and tests it for impairment. The following information is collected:
Book value of goodwill Fair value of CGU Book value of CGU
© Cambridge Business Publishers, 2023 4-30
CGU 1 $ 2,000 10,000 8,500
CGU 2 $ 9,000 25,000 30,000
CGU 3 $ 14,000 55,000 75,000
Advanced Accounting, 5th Edition
Which statement is true, following IFRS? a. b. c. d.
Goodwill impairment is $25,000. Identifiable net assets of CGU 3 are written down by $6,000. Goodwill impairment is $27,500. Identifiable net assets of CGU 1 are written up by $2,500.
ANS:
b CGU 1 CGU 2 CGU 3 Fair value of CGU $ 10,000 $ 25,000 $ 55,000 Book value of CGU 8,500 30,000 75,000 Goodwill impairment loss $ 0 $ 5,000 $ 14,000 Because the goodwill writedown for CGU 3 does not write the CGU down to its fair value, identifiable net assets are evaluated for impairment and appropriately written down.
87.
Topic: Goodwill impairment, IFRS LO 5 A division’s goodwill is not impaired, per IFRS, if: a. b. c. d. ANS:
88.
89.
The fair value of the division is less than the book value of the division. The fair value of the division is more than the book value of the division. The fair value of the identifiable net assets of the division is greater than the book value of its identifiable net assets. The fair value of the identifiable net assets of the division is less than the book value of the division. b
Topic: Goodwill impairment, IFRS LO 5 Which statement is true concerning IFRS goodwill impairment reporting? a. b. c. d.
IFRS does not allow qualitative evaluation of goodwill impairment. IFRS does not require goodwill impairment recognition. IFRS allows goodwill impairment to be reported in other comprehensive income. IFRS allows goodwill impairment to adjust fair value reserves in equity.
ANS:
a
Topic: Adjusting entry, parent uses the cost method LO 6 When the parent uses the cost method, eliminating entry (A) adjusts the parent’s balance sheet accounts to the amounts reported using the complete equity method. Which of the parent’s accounts must be adjusted? a. b. c. d.
Identifiable intangibles, goodwill, and investment in subsidiary Goodwill and retained earnings, beginning of year Accumulated other comprehensive income, beginning of year, and investment in subsidiary Investment in subsidiary, and retained earnings and accumulated other comprehensive income, beginning of year
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-31
ANS: 90.
Topic: Adjusting entry, parent uses the cost method LO 6 If a parent company uses the cost method to account for its investment in subsidiary on its own books, after eliminating entry (C), the parent’s investment account must be adjusted before doing elimination (E), in an amount equal to a. b. c. d. ANS:
91.
d
the change in the subsidiary’s retained earnings and AOCI, adjusted for revaluation write-offs, from the date of acquisition to the beginning of the current year. the subsidiary’s retained earnings and AOCI balances, adjusted for revaluation write-offs from the date of acquisition to the beginning of the current year. the change in the subsidiary’s retained earnings and AOCI, adjusted for revaluation write-offs, from the date of acquisition to the end of the current year. the change in the subsidiary’s retained earnings and AOCI from the date of acquisition to the beginning of the current year. a
Topic: Eliminating entries, parent uses cost method LO 6 A parent acquires its subsidiary on January 1, 2023, at a cost that exceeds the subsidiary’s book value by $10,000. The subsidiary’s assets and liabilities are reported at amounts approximating book value, and there are no previously unreported assets or liabilities. Goodwill from the acquisition is impaired by $200 in 2023 and $300 in 2024. The subsidiary reports net income of $5,000 in 2023 and $3,000 in 2024. The subsidiary has no other comprehensive income and declares no dividends during 2023 or 2024. On the consolidation working paper at December 31, 2024, eliminating entry (A) includes a debit to the investment in subsidiary account in the amount of: a. b. c. d.
$5,000 $2,700 $7,500 $4,800
ANS:
d $5,000 - $200 = $4,800
© Cambridge Business Publishers, 2023 4-32
Advanced Accounting, 5th Edition
Use the following information to answer Questions 92 and 93. A parent acquires the voting stock of a subsidiary on January 1, 2023. Required revaluations of the subsidiary’s net assets are: • •
Previously unreported identifiable intangibles valued at $3 million, with a remaining life of 10 years, straight-line Goodwill
It is now December 31, 2025, three years after the acquisition. The goodwill is unimpaired during this period. The parent reports its investment in the subsidiary using the cost method. The subsidiary reports the following net income, other comprehensive income (loss), and dividends in the three years since the acquisition:
2023 2024 2025
Net Income $600,000 700,000 750,000
Other Comprehensive Income (Loss) $100 120 (50)
Dividends $100,000 100,000 150,000
The following questions related to eliminating entries on the December 31, 2025 consolidation working paper. 92.
93.
Topic: Eliminating entries, parent uses the cost method LO 6 Eliminating entry (A) includes: a. b. c. d.
A debit to Investment in Subsidiary of $1,300,000 A credit to beginning AOCI of $220 A credit to beginning retained earnings of $500,220 A credit to beginning retained earnings of $950,000
ANS:
b Increase in retained earnings: $600,000 + $700,000 – [($3,000,000/10) x 2] - $100,000 $100,000 = $500,000 Increase in AOCI: $100 + $120 = $220 Increase in investment: $500,000 + $220 = $500,220
Topic: Eliminating entries, parent uses the cost method LO 6 Eliminating entry (C) includes a debit of $150,000 to: a. b. c. d.
Dividend income Beginning retained earnings Investment in Subsidiary Beginning AOCI
ANS:
a
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-33
PROBLEMS 1.
Topic: Complete equity method, first year LO 1 A subsidiary is acquired at the beginning of the current year for $20 million in cash. The subsidiary’s book value at the date of acquisition was $3 million. At the date of acquisition, the subsidiary’s inventory (sold during the first year following acquisition) was reported on the subsidiary’s books at an amount that was $300,000 above its fair value. The subsidiary also had previously unreported identifiable intangible assets (5-year life, straight-line) valued at $2 million. The remainder of acquisition cost was allocated to goodwill. During the year, the subsidiary reported net income of $800,000, and other comprehensive income of $10,000. There are no revaluation impairments. The parent uses the complete equity method to report its investment on its own books. Required a. Calculate equity in net income for the year, reported on the parent’s books. b. Prepare the parent’s entries to account for the investment during the year. c. What is the end-of-year balance in the investment account, reported on the parent’s books? ANS: a.
Reported net income Inventory write-off Amortization of ID intangibles Equity in net income
$2,000,000/5
$800,000 300,000 (400,000) $700,000
b. Investment in subsidiary
20,000,000 Cash
Investment in subsidiary
710,000 Equity in OCI Equity in net income
c.
20,000,000
10,000 700,000
$20,000,000 + $710,000 = $20,710,000
© Cambridge Business Publishers, 2023 4-34
Advanced Accounting, 5th Edition
2.
Topic:
Complete equity method, first year
LO 1 Prairie Inc. pays $25,000 for the voting stock of Straw Inc. at the beginning of the current year. Straw’s book value at the date of acquisition is $5,600. The following items are reported on Straw’s books at amounts that are different from their fair values:
Inventories Property, plant & equipment In-process R&D
Fair Value – Book Value $ 400 (3,000) 4,000
Reporting Method FIFO (sold during year) 10-year life, straight-line Indefinite life
For the current year, Straw reported net income of $2,500 and declared and paid dividends of $400. Prairie uses the complete equity method to report its investment on its own books. An impairment test at year-end reveals that 10% of the goodwill arising from this acquisition is impaired. Required a. Calculate equity in net income of Straw Inc. for the year, reported by Prairie on its own books. b. What is the ending balance for Investment in Straw Inc., reported by Prairie on its own books? ANS: a.
Straw’s reported net income Revaluation write-offs: Cost of goods sold increase Depreciation expense decrease Goodwill impairment loss Equity in net income
$ 2,500 $(3,000)/10 10% x $18,000
(400) 300 (1,800) $ 600
Calculation of goodwill: Acquisition cost Book value Excess of acquisition cost over book value Revaluations: Inventory Property, plant & equipment In-process R&D Total revaluations Goodwill b.
$25,000 5,600 19,400 $ 400 (3,000) 4,000
1,400 $18,000
$25,000 + $600 - $400 = $25,200
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-35
3.
Topic: Complete equity method, first and second years LO 1 Princeton Corporation acquired the voting stock of Sheridan Company on January 1, 2023 for $100,000 in cash. Sheridan’s book value at the date of acquisition was $35,000. Sheridan’s net assets were reported at amounts approximating fair value. However, it had previously unreported identifiable intangibles (5-year life, straight-line), valued at $25,000. During 2023, Sheridan reported net income of $7,200 and declared and paid dividends of $400. During 2024, Sheridan reported net income of $6,500 and declared and paid dividends of $300. Goodwill from this acquisition was not impaired in 2023 but was impaired by $1,000 in 2024. Princeton uses the complete equity method to report its investment in Sheridan on its own books. Required a. Calculate equity in net income of Sheridan, reported on Princeton’s books, for 2023 and 2024. b. Calculate the December 31, 2023 and December 31, 2024 balance for Investment in Sheridan, reported on Princeton’s books. ANS: a.
2023 Reported net income Amortization of ID intangibles Equity in net income 2024 Reported net income Amortization of ID intangibles Goodwill impairment Equity in net income
b. 4.
$7,200 (5,000) $2,200
$25,000/5
$6,500 (5,000) (1,000) $ 500
$25,000/5
$100,000 + $2,200 - $400 = $101,800 on December 31, 2023 $101,800 + $500 - $300 = $102,000 on December 31, 2024
Topic: Complete equity method, second year LO 1 A parent acquired the voting stock of its subsidiary at the beginning of 2023, at a $45 million acquisition cost. The subsidiary’s book value at the date of acquisition was $8.5 million. The difference between acquisition cost and book value was allocated to previously unreported inprocess R&D, valued at $3 million, brand names (5-year life, straight-line) valued at $10 million, and goodwill of $23.5 million. There was no impairment of any revaluations in 2023, but goodwill was impaired by $500,000 in 2024. The subsidiary’s retained earnings increased by $2.5 million and its AOCI decreased by $50,000 during 2023. In 2024, the subsidiary reported net income of $2.6 million and an other comprehensive loss of $150,000. The subsidiary did not declare any dividends in 2024. The parent uses the complete equity method to report its investment in the subsidiary on its own books. Required a. Calculate equity in net income for 2024, reported on the parent’s books. b. Calculate the balance for investment in subsidiary, reported on the parent’s books at the end of 2024.
© Cambridge Business Publishers, 2023 4-36
Advanced Accounting, 5th Edition
ANS: a. $2,600,000 – ($10,000,000/5) - $500,000 = $100,000 b. Acquisition cost Change in RE-2023 Change in AOCI-2023 Revaluation write-off-2023 Investment, beginning of 2024 Equity in NI-2024 Equity in OCL-2024 Investment, end of 2024 5.
$45,000,000 2,500,000 (50,000) (2,000,000) 45,450,000 100,000 (150,000) $45,400,000
Topic: Complete equity method, three years after acquisition LO 1 A subsidiary is acquired on January 1, 2023 at an acquisition cost of $100 million. The subsidiary’s book value at the date of acquisition was $25 million, consisting of these accounts: Capital stock Retained earnings Accumulated other comprehensive loss
$ 8,000,000 18,000,000 (1,000,000)
Following is revaluation information for the subsidiary’s identifiable net assets at the date of acquisition: Fair Value Book Value Plant assets, net $30,000,000 $40,000,000 Straight-line, 5 years Identifiable intangible assets 48,000,000 0 Straight-line, 6 years It is now December 31, 2025, three years since the acquisition. The subsidiary reported the following amounts during the period 2023 - 2025:
Net income Other comprehensive income (loss)
2023 $10,000,000 200,000
2024 $8,000,000 150,000
2025 $12,000,000 (25,000)
The subsidiary did not declare any dividends during this period. Goodwill for this acquisition is not impaired as of the end of 2025. The parent uses the complete equity method to report its investment on its own books. Required a. Calculate equity in net income, reported on the parent’s books, for 2025. b. Prepare the parent’s entry or entries to account for the investment during 2025. c. What is the December 31, 2025 balance in the investment account, reported on the parent’s books?
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-37
ANS: a.
Reported net income for 2025 Depreciation adjustment, plant assets Amortization of ID intangibles Equity in net income for 2025
$10,000,000/5 $48,000,000/6
$12,000,000 2,000,000 (8,000,000) $ 6,000,000
b. Equity in OCL Investment in subsidiary
25,000 5,975,000 Equity in net income
c.
6.
6,000,000
Equity in net income for 2023 and 2024:
Reported net income Depreciation adjustment, plant assets Amortization of ID intangibles Equity in net income
2023 $10,000,000 2,000,000 (8,000,000) $ 4,000,000
Investment, January 1, 2023 Equity in net income, 2023 Equity in OCI, 2023 Equity in net income, 2024 Equity in OCI, 2024 Equity in net income, 2025 Equity in OCL, 2025 Investment, December 31, 2025
$100,000,000 4,000,000 200,000 2,000,000 150,000 6,000,000 (25,000) $112,325,000
2024 $8,000,000 2,000,000 (8,000,000) $ 2,000,000
Topic: Complete equity method, four years after acquisition LO 1 Pointer Company acquired the voting common stock of Setter Industries on January 1, 2021 for $35,000. The $30,000 excess of acquisition cost over Setter’s book value was allocated as follows: Inventories Plant & equipment Internet domain name Customer order backlog
$ (2,500) (5,000) 6,000 1,000
Goodwill Total excess of acquisition cost over book value
30,500
© Cambridge Business Publishers, 2023 4-38
FIFO (sold in 2021) 10 years, straight-line 3 years, straight-line 2 years, straight-line Cumulative impairment, 2021 – 2023 = $200 2024 impairment = $150
$30,000
Advanced Accounting, 5th Edition
Setter’s book value on January 1, 2021 was: Capital stock Retained earnings Accumulated other comprehensive income Treasury stock Total
$
500 4,550 150 (200) $ 5,000
Setter reported 2024 net income of $5,000 and other comprehensive income of $80. Its retained earnings balance on December 31, 2023 was $9,200, and its December 31, 2023 balance for accumulated other comprehensive income was $200. On its own books, Pointer accounts for its investment in Setter using the complete equity method. Required a. Calculate equity in net income of Setter for 2024, reported on Pointer’s books. b. Prepare the journal entry or entries Pointer makes on its own books in 2024 to account for its investment in Setter. c. Calculate the balance for Investment in Setter at December 31, 2024, reported on Pointer’s books. ANS: a.
Setter’s reported income Revaluation write-offs: Plant & equipment Goodwill Equity in net income for 2024
$5,000 $5,000/10
500 (150) $5,350
b. Investment in Setter
5,430 Equity in net income of Setter Equity in OCI of Setter
c.
Investment balance, date of acquisition Change in RE to beginning of 2024 Change in AOCI to beginning of 2024 Write-offs of revaluations, 2021 – 2023: Inventory Plant & equipment Internet domain name Customer order backlog Goodwill Investment balance, 1/1/24 Equity in net income, 2024 Equity in OCI, 2024 Investment balance, 12/31/24
Test Bank, Chapter 4
$9,200 – $4,550 $200 - $150 full amount ($5,000/10) x 3 full amount full amount
5,350 80 $35,000 4,650 50 2,500 1,500 (6,000) (1,000) (200) 36,500 5,350 80 $41,930
© Cambridge Business Publishers, 2023 4-39
7.
Topic: Impairment testing of identifiable intangible assets LO 2 When Practime acquired Stratus Technologies on January 1, 2022, the following previously unreported intangible assets were recognized as part of the acquisition: Fair Value, January 1, 2022 $ 8,000 6,000
Intangible Asset Brand names Royalty agreements
Asset Type Indefinite life Limited life, 5 years, SL
It is now December 31, 2024, the end of the accounting year, and three years since the acquisition. No impairment has been reported on either of the intangibles in 2022 or 2023. Practime bypasses the qualitative impairment test for all intangibles, where this option is available. You have the following information regarding the identifiable intangibles at December 31, 2024: Total Expected Future Net Cash Inflows, Undiscounted $ 8,500 2,200
Intangible asset Brand names Royalty agreements
Total Expected Future Net Cash Inflows, Discounted $ 6,500 1,800
Required Calculate the impairment loss on each of the identifiable intangibles for 2024, following U.S. GAAP. ANS:
Brand names Royalty agreements Total impairment loss 8.
BV $8,000 2,400
BV > Sum of Undiscounted CFs? N/A $2,400 > $2,200? Yes
Loss = BV - DCF $8,000 – $6,500 = $2,400 - $1,800 =
Loss $1,500 600 $2,100
Topic: Identifiable intangibles impairment testing LO 2 When Prestige Inc. acquired Squiggle Technologies, the following previously unreported intangible assets were recognized as part of the acquisition: Intangible Asset Developed product technology Royalty agreements Customer relationships
Book Value at December 31, 2024 $ 750 115 170
Asset Type Indefinite life Limited life Limited life
It is now December 31, 2024, the end of the accounting year. Amortization for 2024 has already been properly recorded.
© Cambridge Business Publishers, 2023 4-40
Advanced Accounting, 5th Edition
You have the following information regarding these intangibles: Intangible Asset Developed product technology Royalty agreements Customer relationships
Total Expected Future Net Cash Inflows, Undiscounted $ 800 105 175
Total Expected Future Net Cash Inflows, Discounted $ 550 85 110
Required Calculate the impairment loss on each of the intangibles for 2024, following U.S. GAAP. ANS:
Developed product technology Royalty agreements Customer relationships Total impairment loss 9.
BV > Sum of Undiscounted CFs? N/A Yes No
$750 – $550 = $115 - $85 = --
Loss $200 30 0 $230
Topic: Goodwill allocation and impairment LO 3 Primera Company acquired Stargaze Corporation on January 1, 2024, at a cost of $32,000. Stargaze consists of three reporting units, Uno, Dos, and Tres. Relevant data for the acquisition is as follows: Uno Dos Tres Fair value of identifiable tangible and intangible assets $25,000 $11,000 $14,000 Fair value of liabilities 15,000 9,000 6,000 Fair value of reporting unit 20,000 6,000 10,000 On December 31, 2024, the following amounts were estimated: Uno Book value of unit $21,500 Fair value of unit 22,000
Dos $ 4,500 3,500
Tres $ 10,000 9,500
Required a. Determine the total goodwill and its allocation to reporting units at January 1, 2024. b. Calculate the goodwill impairment loss for 2024, if any. Assume that it is more likely than not that goodwill is impaired in all three reporting units.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-41
ANS: a.
Fair value of identifiable assets acquired Fair value of liabilities assumed Fair value of net identifiable assets acquired Acquisition cost Goodwill
Fair value of identifiable assets Liabilities Fair value of identifiable net assets Fair value of reporting unit Tentative goodwill 25% reduction Goodwill allocation
$ 50,000 (30,000) 20,000 32,000 $ 12,000
Uno $25,000 15,000
Dos $ 11,000 9,000
Tres $14,000 6,000
10,000 20,000 10,000 (2,500) $ 7,500
2,000 6,000 4,000 (1,000) $ 3,000
8,000 10,000 2,000 (500) $ 1,500
Uno 22,000 21,500 $ 0
Dos 3,500 4,500 $ 1,000
Tres 9,500 10,000 $ 500
b. Fair value of unit Book value of unit Impairment loss
Total goodwill impairment for 2024 = $1,500. 10.
Topic: Goodwill impairment LO 3 Millbrook Industries reports $6,700 million in goodwill, allocated to the following reporting units (in millions): U.S. Retail $5,000 International 150 Bakeries and Food Service 1,550 Total $6,700 At the end of 2024, Millbrook determines that it is more likely than not that goodwill is impaired for all three reporting units. It collects the following information (in millions): Reporting unit U.S. Retail International Bakeries and Food Service
© Cambridge Business Publishers, 2023 4-42
Fair Value $45,000 3,000 10,000
Book Value $46,000 3,125 9,500
Advanced Accounting, 5th Edition
Required Calculate the total goodwill impairment loss for 2024, following U.S. GAAP. ANS (in millions):
Fair value Book value Goodwill impairment loss
U.S. Retail $45,000 46,000 $1,000
International $3,000 3,125 $ 125
Bakeries and Food Service $10,000 9,500 $ 0
Total impairment loss is $1,000 + $125 = $1,125 11.
Topic: Complete equity method and eliminating entries, first year LO 1, 4 On January 1, 2024, Panadrone Inc. acquired all of the stock of Skyline Telecom for $75,000 in cash. At the date of acquisition, Skyline’s shareholders’ equity accounts were as follows: Common stock, $1 par……………………………………………………………………….. $ 1,000 Additional paid-in capitial………………………………………………………………….. 14,000 Retained earnings……………………………………………………………………………… (4,900) Treasury stock…………………………………………………………………………………… (100) Total………………………………………………………………………………………………….. $ 10,000 Both companies have a December 31 year-end. At the date of acquisition, Skyline’s reported net assets had book values approximating fair value. However, it had previously unreported indefinite life identifiable intangibles valued at $25,000, meeting ASC Topic 805 requirements for capitalization. Goodwill from this acquisition was impaired by $1,000 in 2024. Skyline reported net income of $1,500 in 2024, and declared no dividends. Panadrome uses the complete equity method to report its investment in Skyline on its own books. Required a. Calculate the original amount of goodwill for this acquisition. b. Calculate equity in net income of Skyline, reported on Panadrone’s books in 2024. c. Prepare eliminating entries (C), (E), (R) and (O), required to consolidate Panadrone’s trial balance accounts with those of Skyline on December 31, 2024. ANS: a. Acquisition cost Book value Excess of acquisition cost over book value Identifiable intangibles Goodwill
$ 75,000 (10,000) 65,000 (25,000) $ 40,000
b. Reported net income Impairment loss Equity in net income
$ 1,500 (1,000) $ 500
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-43
c. (C) Equity in net income of Skyline Investment in Skyline
500 500
(E) Common stock, $1 par Additional paid-in capital Retained earnings, January 1 Treasury stock Investment in Skyline
12.
1,000 14,000 4,900 100 10,000
(R) Identifiable intangibles Goodwill Investment in Skyline
25,000 40,000
(O) Impairment loss Goodwill
1,000
65,000
1,000
Topic: Equity method, consolidation eliminating entries, end of first year LO 1, 4 Pacific Corporation acquired all of the voting stock of Seagate Inc. at an acquisition cost of $96.9 million on January 1, 2024. Seagate’s book value at the date of acquisition was $75 million, consisting of $10 million in capital stock, $60 million in retained earnings, and $5 million in AOCI. Seagate’s identifiable net assets were revalued as follows: Plant assets, net Customer lists Bonds payable
Fair Value $15,000,000 1,800,000 1,000,000
Book Value $25,000,000 0 1,100,000
10-year life 3-year life 5-year life
During 2024, Seagate reported net income of $4,000,000 and other comprehensive income of $80,000. No revaluations were impaired. The bond discount is straight-line amortized. Pacific reports its investment in Seagate on its own books using the complete equity method. Required a. Calculate equity in net income for 2024, reported on Pacific’s books. b. Prepare eliminating entries (C), (E), (R) and (O), to consolidate the trial balances of Pacific and Seagate at December 31, 2024. Assume revaluation write-offs of customer lists and plant assets are reported as adjustments to operating expenses, while the write-off of the bonds revaluation is an adjustment to nonoperating expenses.
© Cambridge Business Publishers, 2023 4-44
Advanced Accounting, 5th Edition
ANS: a.
b.
Reported net income Plant asset revaluation write-off Customer lists amortization Bonds payable discount amortization Equity in net income
$10,000,000/10 $1,800,000/3 $100,000/5
(C) Equity in net income Equity in OCI
$4,000,000 1,000,000 (600,000) (20,000) $4,380,000 4,380,000 80,000
Investment in Seagate (E) Capital stock Retained earnings, beginning AOCI, beginning
4,460,000
10,000,000 60,000,000 5,000,000 Investment in Seagate
(R) Bonds payable Customer lists Goodwill
75,000,000
100,000 1,800,000 30,000,000 Plant assets, net Investment in Seagate
10,000,000 21,900,000
Goodwill calculation: Acquisition cost Book value Excess Revaluations: Plant assets Customer lists Bonds payable Goodwill
$96,900,000 75,000,000 21,900,000 $(10,000,000) 1,800,000 100,000
(8,100,000) $30,000,000
(O) Plant assets, net Nonoperating expenses
1,000,000 20,000 Customer lists Bonds payable Operating expenses
Test Bank, Chapter 4
600,000 20,000 400,000
© Cambridge Business Publishers, 2023 4-45
13.
Topic: Equity method, consolidation eliminating entries, first year LO 1, 4 Prism Corporation acquires the voting stock of Streetspace Inc. on January 1, 2024, for $80,000 in cash. Streetspace’s book value at the date of acquisition was: Common stock, $1 par Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total
$
100 5,900 6,000 (200) $11,800
All of Streetspace’s recorded assets and liabilities are carried at amounts approximating fair value, but it has previously unrecorded customer-related intangible assets valued at $40,000 that are capitalizable under the requirements of ASC Topic 805. These intangibles have an estimated life of 5 years, straight-line. Streetspace reports net income of $12,000 and other comprehensive income of $50 for 2024, and declares and pays dividends of $1,500. It is determined through impairment testing that acquired goodwill is impaired by $1,000 and the customer-related intangible assets are not impaired. Prism uses the complete equity method to account for its investment in Streetspace on its own books. Required a. Calculate the amount Prism reports for 2024 as equity in net income of Streetspace on its own books. b. Present, in journal entry form, the four eliminating entries needed to consolidate the trial balances of Prism and Streetspace at December 31, 2024. Revaluation write-offs are adjustments to operating expenses. ANS: a.
b.
Streetspace’s reported net income Less amortization of previously unreported intangibles Less goodwill impairment loss Equity in net income of Streetspace
$ 12,000 (8,000) (1,000) $ 3,000
(C) Equity in NI of Streetspace Equity in OCI of Streetspace
3,000 50 Dividends Investment in Streetspace
(E) Common stock Additional paid-in capital Retained earnings, beg.
100 5,900 6,000 AOCL, beg. Investment in Streetspace
© Cambridge Business Publishers, 2023 4-46
1,500 1,550
200 11,800
Advanced Accounting, 5th Edition
(R) ID intangible assets Goodwill
40,000 28,200 Investment in Streetspace
68,200
Goodwill at acquisition = $80,000 - $11,800 - $40,000 = $28,200. (O) Operating expenses
9,000 ID intangible assets Goodwill
14.
Topic: Equity method, acquisition cost, consolidation eliminating entries, first year LO 1, 4 On January 2, 2025, Park issued no-par capital stock with a market value of $1,000 for all of the voting stock of Sun. Registration fees in connection with issuing the stock are $100, paid in cash. Consulting, accounting, and legal fees connected with the merger are $250, paid in cash. In addition, Park enters into an earnings contingency agreement, whereby Park will pay the former shareholders of Sun an additional amount if Sun’s performance meets certain minimum levels. The present value of the contingency is estimated at $200. Sun Corporation’s trial balance at the date of acquisition is as follows:
Cash and receivables Inventories Property, plant and equipment, net Accounts payable Long-term debt Capital stock Treasury stock Retained earnings Accumulated other comprehensive income Total
Dr (Cr) $ 400 500 4,500 (300) (3,800) (1,200) 50 (135) (15) $ 0
An analysis of Sun’s assets and liabilities reveals that book values of some reported items do not reflect their fair values at the date of acquisition: • Inventories are undervalued by $300. • Property, plant and equipment is overvalued by $1,000. • Long-term debt is undervalued by $50. Acquisition-date inventories were sold in 2025. Property, plant and equipment has a 10-year remaining life, straight-line. The long-term debt has an average remaining term of two years, and the premium is straight-line amortized.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-47
8,000 1,000
The following items are not currently reported on Sun’s balance sheet: • Favorable lease agreements, valued at $25. • Signed customer contracts for product development, valued at $22. • In-process research and development, valued at $120. • There are lawsuits pending against Sun. The best estimate of likely losses on these lawsuits, at present value, is $7. The in-process research and development is an indefinite life intangible. The lease agreements have limited lives of 5 years, and customer contracts have limited lives of two years, both amortized on a straight-line basis. It is now December 31, 2025. Sun reported net income of $500, an other comprehensive loss of $5, and declared no dividends. Required a. Calculate Park’s acquisition cost for its investment in Sun, and the initial balance for goodwill. b. Calculate equity in net income of Sun for 2025. c. Calculate the December 31, 2025 balance in Investment in Sun, on Park’s books. d. Prepare the consolidation working paper eliminating entries for 2025. ANS: a.
Park’s entry to record the acquisition is: Investment in Sun Merger expenses Capital stock Earnings contingency liability Cash Therefore, its acquisition cost is $1,200. Acquisition cost Book value Revaluations: Inventories Plant & equipment Long-term debt Lease agreements Customer contracts In-process R&D Lawsuit liability Goodwill
b.
Sun’s net income Inventory write-off Plant & equipment write-off Long-term debt write-off Lease agreements write-off Customer contracts write-off Equity in net income
© Cambridge Business Publishers, 2023 4-48
$ 300 (1,000) (50) 25 22 120 (7)
$(1,000)/10 $(50)/2 $25/5 $22/2
1,200 250 900 200 350 $1,200 1,300 (100)
(590) $ 490 $ 500 (300) 100 25 (5) (11) $ 309
Advanced Accounting, 5th Edition
c.
d.
Acquisition cost Equity in net income Other comprehensive loss Investment balance, December 31, 2025
$1,200 309 (5) $1,504
(C) Equity in net income
309 Equity in OCL Investment in Sun
(E) Capital stock Retained earnings, beg. AOCI, beg.
5 304 1,200 135 15
Treasury stock Investment in Sun (R) Inventories Lease agreements Customer contracts In-process R&D Goodwill Investment in Sun
50 1,300 300 25 22 120 490 100
Plant & equipment Long-term debt Lawsuit liability (O) Cost of goods sold Amortization expense Plant & equipment Long-term debt
300 16 100 25 Inventories Lease agreements Customer contracts Depreciation expense Interest expense
Test Bank, Chapter 4
1,000 50 7
300 5 11 100 25
© Cambridge Business Publishers, 2023 4-49
15.
Topic: Acquisition cost, complete equity method, eliminating entries, second year LO 1, 4 Photec Corporation acquires the voting stock of Solarcentury Inc. on January 1, 2024. In preparing to consolidate the trial balances of Photec and Solarcentury at December 31, 2025 (two years after the acquisition), you assemble the following information: Date-of-acquisition information: 1. Value of stock issued to Solarcentury shareholders: $79,500. 2. Direct merger costs are $600 and stock registration fees are $250, all paid in cash. 3. Solarcentury shareholders’ equity: capital stock, $1,000; retained earnings, $16,000; accumulated other comprehensive income, $400. 4. Fair value of earnings contingency agreement to be paid in cash: $500. 5. Fair value of previously unrecorded identifiable intangibles (5-year life): $18,000. There are no revaluations of Solarcentury’s reported net assets. Information for 2024 and 2025: 6. Solarcentury’s reported net income for 2024: $6,000; for 2025: $7,500. 7. Solarcentury’s reported other comprehensive income for 2024: $150 gain; for 2025: $120 loss. 8. Solarcentury declared and paid dividends of $400 each year. 9. Goodwill and identifiable intangibles are not impaired in 2024; goodwill is impaired by $500 in 2025. Required a. Prepare the 2024 and 2025 journal entries made by Photec to record its investment, using the complete equity method. b. Prepare the consolidation eliminating entries (C), (E), (R) and (O), made at December 31, 2025. ANS: a. The acquisition entry is as follows: Investment in Solarcentury Merger expenses Capital stock Contingent consideration liability Cash Calculation of equity in net income: Solarcentury’s reported net income Revaluation write-off: Identifiable intangibles $18,000/5 Goodwill impairment loss Equity in net income of Solarcentury
© Cambridge Business Publishers, 2023 4-50
80,000 600 79,250 500 850 2024 $ 6,000
2025 $ 7,500
(3,600) -$ 2,400
(3,600) (500) $ 3,400
Advanced Accounting, 5th Edition
Photec’s equity method entries for 2024 and 2025: 2024: Investment in Solarcentury Equity in net income of Solarcentury Equity in OCI of Solarcentury
2,550 2,400 150
Cash
400 Investment in Solarcentury
400
2025: Investment in Solarcentury Equity in OCL of Solarcentury Equity in net income of Solarcentury
3,280 120 3,400
Cash
400 Investment in Solarcentury
b.
400
Consolidation working paper eliminating entries for 2025: (C) Equity in net income of Solarcentury Equity in OCL of Solarcentury Dividends – Solarcentury Investment in Solarcentury
3,400 120 400 2,880
(E) Capital stock, 1/1 Retained earnings, 1/1 (1) Accumulated OCI, 1/1 (2) Investment in Solarcentury (1) (2)
1,000 21,600 550 23,150
$16,000 + $6,000 - $400 = $21,600. $400 + $150 = $550.
(R) Identifiable intangibles (3) Goodwill (4) Investment in Solarcentury (3) (4)
59,000
$18,000 - $3,600 = $14,400. $80,000 - $1,000 - $16,000 - $400 - $18,000 - = $44,600.
(O) Amortization expense Goodwill impairment loss Identifiable intangibles Goodwill
Test Bank, Chapter 4
14,400 44,600
3,600 500 3,600 500
© Cambridge Business Publishers, 2023 4-51
16.
Topic: Equity method, consolidation eliminating entries, second year LO 1, 4 On January 1, 2023, Penn Corporation acquired the voting stock of Shea Company at an acquisition cost of $116,000. Some of Shea’s assets and liabilities at the date of acquisition had fair values that were different from reported values, as follows:
Plant and equipment, net Favorable leaseholds Warranty liabilities
Book Value Dr (Cr) $300,000 0 0
Fair Value Dr (Cr) $ 220,000 35,000 (25,000)
At the date of acquisition, the plant and equipment had a 20-year remaining life, and the favorable leases had a 5-year remaining life, straight-line. Goodwill from this acquisition is not impaired as of the end of 2024. Warranty payments connected with the revaluation liability were $1,000 in 2023 and $2,000 in 2024. Shea’s total shareholders’ equity at January 1, 2023 appears below: Capital stock $ 20,000 Retained earnings 45,000 Accumulated other comprehensive income 1,000 Total $ 66,000 Shea did not declare any dividends in 2023 or 2024. It is now December 31, 2024 (2 years later). Penn uses the complete equity method to account for its investment. Shea’s December 31, 2024 trial balance is as follows: Dr (Cr) Current assets $ 22,000 Plant and equipment, net 270,000 Identifiable intangible assets – Goodwill – Liabilities (200,000) Capital stock (20,000) Retained earnings, beginning (55,000) Accumulated other comprehensive income, beginning (1,200) Sales revenue (1,000,000) Cost of goods sold 800,000 Operating expenses 185,000 Other comprehensive income (800) Total $ 0 Required a. Calculate the goodwill recognized with this acquisition. b. Calculate equity in net income for 2023 and 2024, reported on Penn’s books. c. Calculate the December 31, 2024 balance for Investment in Shea, reported on Penn’s books. d. Present consolidation eliminating entries (C), (E), (R) and (O) to consolidate the December 31, 2024 trial balances of Penn and Shea. © Cambridge Business Publishers, 2023 4-52
Advanced Accounting, 5th Edition
ANS: a.
Acquisition cost Book value Excess Revaluations: Plant and equipment Favorable leaseholds Warranty liabilities Goodwill
$116,000 66,000 50,000 $(80,000) 35,000 (25,000)
(70,000) $120,000
b. 2023 $10,000
c.
d.
2024 $15,000
Reported net income Revaluation write-offs: Plant and equipment 4,000 4,000 Favorable leases (7,000) (7,000) Warranties 1,000 2,000 Equity in net income $ 8,000 $14,000 Note: 2023 NI = $55,000 - $45,000; 2024 NI = $1,000,000 - $800,000 - $185,000. Investment, January 1, 2023 Equity in net income, 2023 Equity in net income, 2024 Change in AOCI, 2023-2024 Investment, December 31, 2024
$116,000 8,000 14,000 1,000 $139,000
(C) Equity in net income Equity in OCI
14,000 800 Investment in Shea
(E) Capital stock Retained earnings, beginning AOCI, beginning
14,800
20,000 55,000 1,200 Investment in Shea
(R) Favorable leaseholds Goodwill
76,200
28,000 120,000 Plant and equipment, net Warranty liabilities Investment in Shea
(O) Operating expenses Plant and equipment, net Warranty liabilities
1,000 4,000 2,000 Favorable leases
Test Bank, Chapter 4
76,000 24,000 48,000
7,000
© Cambridge Business Publishers, 2023 4-53
17.
Topic: Equity method, consolidation eliminating entries, third year LO 1, 4 Playlink Corporation acquired the voting stock of Squaredeal Company on January 1, 2023 for $10,000 in cash. Squaredeal’s book value was $3,700 at the date of acquisition, comprised of the following accounts: Dr (Cr) Capital stock $ (2,500) Retained earnings, beginning (1,300) Accumulated other comprehensive loss 100 Total $ (3,700) The $6,300 excess of acquisition cost over book value was allocated as follows:
Inventory Plant & equipment Lease agreements Trademarks Goodwill
Fair Value less Book Value $ (200) 1,000 2,000 3,000 500
Total
Subsequent Measurement Sold in 2023 25-year remaining life, straight-line 2-year remaining life, straight-line 6-year remaining life, straight-line $100 total impairment during 2023-2024, no impairment in 2025
$6,300
It is now December 31, 2025, three years since the acquisition. Playlink uses the complete equity method to account for its investment in Squaredeal on its own books. Squaredeal’s trial balance at December 31, 2025 is as follows: Dr (Cr) Cash, receivables $ 600 Inventory 1,400 Plant & equipment, net 8,400 Liabilities (1,425) Capital stock (2,500) Retained earnings, beginning (5,000) Accumulated other comprehensive income, beg. (150) Dividends 200 Sales revenue (15,000) Cost of goods sold 12,000 Operating expenses 1,500 Other comprehensive income (25) Total $ 0 Required a. Calculate 2025 equity in net income of Squaredeal, appearing in Playlink’s December 31, 2025 trial balance. b. Prepare a schedule calculating Playlink’s December 31, 2025 Investment in Squaredeal balance. c. Prepare the eliminating entries necessary to consolidate the trial balances of Playlink and Squaredeal at December 31, 2025. © Cambridge Business Publishers, 2023 4-54
Advanced Accounting, 5th Edition
ANS: a.
b.
c.
Squaredeal’s reported net income Adjustments: Plant & equipment Trademarks Equity in net income of Squaredeal
$1,500 (40) (500)
Acquisition cost Change in retained earnings, 2023-2024 Change in AOCI, 2023-2024 Revaluation write-offs, 2023-2024: Inventory Plant & equipment Lease agreements Trademarks Goodwill Investment balance, January 1, 2025 Equity in net income, 2025 Equity in OCI, 2025 Dividends Investment balance, December 31, 2025
(540) $ 960
$5,000 - $1,300 = $100 + $150 = Entire amount ($1,000/25) x 2 Entire amount ($3,000/6) x 2
(C) Equity in net income Equity in OCI
$ 10,000 3,700 250 200 (80) (2,000) (1,000) (100) 10,970 960 25 (200) $ 11,755
960 25 Dividends Investment in Squaredeal
(E) Capital stock Retained earnings, beginning AOCI, beginning
200 785
2,500 5,000 150 Investment in Squaredeal
(R) Plant & equipment, net Trademarks Goodwill
7,650
920 2,000 400 Investment in Squaredeal
(O) Operating expenses
540 Plant & equipment, net Trademarks
Test Bank, Chapter 4
3,320
40 500
© Cambridge Business Publishers, 2023 4-55
18.
Topic: Equity method, consolidation eliminating entries, third year LO 1, 4 Prism Corporation acquires the voting stock of Streetspace Inc. on January 1, 2024, for $80,000 in cash. Streetspace’s book value at the date of acquisition was: Common stock, $1 par Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total
$ 2,000 4,000 6,000 (200) $11,800
All of Streetspace’s recorded assets and liabilities are carried at amounts approximating fair value, but it has previously unrecorded customer-related intangible assets valued at $40,000 that are capitalizable under the requirements of ASC Topic 805. These intangibles have an estimated life of 5 years, straight-line. It is determined through impairment testing that acquired goodwill is impaired by $1,000 in 2024, and is unimpaired in 2025 and 2026. Customer-related intangible assets are not impaired during the three years following acquisition. Streetspace reports net income, other comprehensive income, and declared and paid dividends as follows for 2024, 2025, and 2026:
Net income Other comprehensive income (loss) Dividends
2024 $12,000 50 1,500
2025 $8,000 (40) 1,500
2026 $10,000 90 1,500
Prism uses the complete equity method to account for its investment in Streetspace on its own books. Required a. Calculate the amount Prism reports for 2026 as equity in net income of Streetspace on its own books. b. Present, in journal entry form, the four eliminating entries needed to consolidate the trial balances of Prism and Streetspace at December 31, 2026. Revaluation write-offs are adjustments to operating expenses. ANS: a.
Streetspace’s reported net income Less amortization of previously unreported intangibles Equity in net income of Streetspace
© Cambridge Business Publishers, 2023 4-56
$10,000 (8,000) $ 2,000
Advanced Accounting, 5th Edition
b.
(C) Equity in NI of Streetspace Equity in OCI of Streetspace
2,000 90 Dividends Investment in Streetspace
(E) Common stock Additional paid-in capital Retained earnings, beg.
1,500 590
2,000 4,000 23,000
AOCL, beg. 190 Investment in Streetspace 28,810 Retained earnings, beginning of 2026 = $6,000+$12,000-$1,500+$8,000-$1,500 = $23,000 AOCL, beginning of 2026 = $(200) + $50 - $40 = $(190) (R) ID intangible assets Goodwill
24,000 27,200
Investment in Streetspace Goodwill at acquisition = $80,000 - $11,800 - $40,000 = $28,200; Goodwill to beginning of 2026 = $28,200 - $1,000 = $27,200. (O) Operating expenses
8,000 ID intangible assets
19.
51,200
8,000
Topic: Consolidation eliminating entries, four years since acquisition LO 4 A parent acquired the voting stock of its subsidiary on January 1, 2022. The excess of acquisition cost over the subsidiary’s book value was allocated as indicated in the table below.
Property
Fair Value less Book Value $(100,000)
Identifiable intangible assets
60,000
Goodwill
800,000
Long-term debt
20,000
Subsequent Measurement 10-year life, straight-line, no impairment in any year 3-year life, straight-line, no impairment in any year Total impairment of $100,000 in years 20222024; no impairment in 2025 5-year life, straight-line
It is now December 31, 2025, the fourth year since acquisition. Required a. Prepare eliminating entry (R) on the December 31, 2025 consolidation working paper. b. Prepare eliminating entry (O) on the December 31, 2025 consolidation working paper. Use “operating expenses” for any adjustments to depreciation, amortization, or impairment losses. Use “nonoperating expenses” for any adjustments to interest expense.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-57
ANS: a.
(R) Goodwill
700,000 Property 70,000 Long-term debt 8,000 Investment in subsidiary 622,000 To recognize revaluations as of the beginning of 2025. Note: ID intangibles revaluation is completely written off as of the beginning of 2025. b.
(O) Property Long-term debt
10,000 4,000
Operating expenses Nonoperating expenses To write off the revaluations for 2025. 20.
10,000 4,000
Topic: Investment balance and consolidation eliminating entries, four years since acquisition LO 1, 2, 4 A parent acquired all of the voting stock of its subsidiary at an acquisition cost of $20,000. The subsidiary’s book value at the date of acquisition was $4,000, consisting of $500 capital stock, $3,400 retained earnings, and $100 accumulated other comprehensive income. The $16,000 difference between acquisition cost and book value was attributed as follows: Plant and equipment Favorable lease agreements Developed technology Goodwill Total
$(2,000) 4,200 3,000 10,800 $16,000
5-year life, straight-line 6-year life, straight-line 3-year life, straight-line Not impaired
It is now four years since the acquisition, and the parent is consolidating the subsidiary’s trial balance. The subsidiary’s book value as of the beginning of the year is $8,700, consisting of $500 capital stock, $8,000 retained earnings, and $200 accumulated other comprehensive income. For the current year, the subsidiary reported net income of $1,500 and other comprehensive income of $15. Required a. The parent uses the complete equity method to report its investment in subsidiary on its own books. Calculate the investment balance as of the end of the fourth year. b. Prepare eliminating entries (C), (E), (R) and (O) to consolidate the trial balances of the parent and subsidiary at the end of the fourth year.
© Cambridge Business Publishers, 2023 4-58
Advanced Accounting, 5th Edition
ANS: a. Acquisition cost Change in RE and AOCI to beginning of year Revaluation write-offs to beginning of year: P&E Favorable lease agreements Developed technology Investment, beginning of year Equity in NI for year Equity in OCI for year Investment, end of year b.
$8,200 - $3,500 $((2,000)/5) x 3 $((4,200/6) x 3
$1,500 + $(2,000/5) - $(4,200/6)
(C) Equity in NI Equity in OCI
$20,000 4,700 1,200 (2,100) (3,000) 20,800 1,200 15 $22,015
1,200 15 Investment in subsidiary
(E) Capital stock Retained earnings, beg. AOCI, beg.
1,215
500 8,000 200 Investment in subsidiary
(R) Favorable leases Goodwill
8,700
2,100 10,800 P&E Investment in subsidiary
(O) Operating expenses P&E
800 12,100
300 400 Favorable leases
21.
Topic: Consolidation working paper, first year LO 1, 4 Portobello Company bought all of Strata Company’s voting stock on January 1, 2024 for $25,000. Strata’s assets and liabilities at the date of acquisition were reported at amounts approximating fair value. However, previously unreported identifiable intangibles, meeting the criteria for capitalization, are valued at $4,000. These intangibles have indefinite lives, but testing reveals impairment of $500 in 2024. Goodwill reported for this acquisition is not impaired in 2024. Portobello uses the complete equity method to account for its investment in Strata on its own books. Trial balances for both companies at December 31, 2024 are in the consolidation working paper below.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-59
700
Current assets Property & equipment, net Identifiable intangible assets Investment in Strata Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Accumulated other comprehensive loss (income), Jan. 1 Treasury stock Dividends Sales revenue Equity in NI of Strata Equity in OCI of Strata Cost of goods sold Operating expenses Other comprehensive loss (income) Total
Portobello Dr (Cr) $ 15,000 120,000
Strata Dr (Cr) $10,000 60,000
-27,600 -(89,950) (30,000) (41,000)
---(58,900) (1,000) (7,050)
1,000 2,000 500 (85,000) (2,500) (100) 60,000 22,000
(50) 100 – (40,000) – -25,000 12,000
$
450 0
$
Dr
Cr
Consol. Dr (Cr)
(100) 0
Required a. Calculate the initial goodwill recognized for this acquisition. b. Calculate equity in net income, reported on Portobello’s books, for 2024. c. Fill in the working paper to consolidate the trial balances of the two companies at December 31, 2024. d. Prepare, in good form, the 2024 consolidated statement of income and comprehensive income and the consolidated balance sheet at December 31, 2024. ANS: a.
b.
Acquisition cost Book value, date of acquisition Excess of acquisition cost over book value Revaluations: ID intangibles Goodwill
$25,000 8,000 17,000 4,000 $13,000
Strata’s reported net income Revaluation write-off: ID intangibles Equity in NI
$3,000 (500) $2,500
© Cambridge Business Publishers, 2023 4-60
Advanced Accounting, 5th Edition
c.
December 31, 2024 consolidation working paper
Current assets Property & equipment, net Identifiable intangible assets Investment in Strata
Portobello Dr (Cr) $ 15,000
Strata Dr (Cr) $ 10,000
120,000
60,000
-27,600
---
Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Accumulated other comprehensive loss (income), Jan. 1 Treasury stock Dividends Sales revenue Equity in NI of Strata Equity in OCI of Strata Cost of goods sold Operating expenses Other comprehensive loss (income) Total
$
Dr
Cr
180,000 (R)
4,000
-(89,950) (30,000) (41,000)
-- (R) 13,000 (58,900) (1,000) (E) 1,000 (7,050) (E) 7,050
1,000 2,000 500 (85,000) (2,500) (100) 60,000 22,000
(50) 100 – (40,000) --25,000 12,000
450 0
$
(100) 0
Consol. Dr (Cr) $ 25,000
(E)
500(O) 2,600 (C) 8,000 (E) 17,000 (R)
13,000 (148,850) (30,000) (41,000)
50 100 (E)
(C) (C)
2,500 100
(O)
500
$28,200
3,500 --
$28,200
1,000 2,000 500 (125,000) --85,000 34,500
$
350 0
d. Consolidated Statement of Income and Comprehensive Income For the year ending December 31, 2024 Sales revenue Cost of goods sold Gross margin Operating expenses Net income Other comprehensive loss Comprehensive income
Test Bank, Chapter 4
$ 125,000 (85,000) 40,000 (34,500) 5,500 (350) $ 5,150
© Cambridge Business Publishers, 2023 4-61
Consolidated Balance Sheet December 31, 2024 Assets Liabilities Current assets $ 25,000 Property & equipment, net 180,000 Equity Identifiable intangible assets 3,500 Capital stock Goodwill 13,000 Retained earnings (1) Accumulated other comprehensive loss (2) Treasury stock ________ Total equity Total assets $ 221,500 Total liabilities & equity
$ 148,850
30,000 46,000 (1,350) (2,000) 72,650 $ 221,500
(1) $41,000 + $5,500 - $500 = $46,000 (2) $1,000 + $350 = $1,350
22.
Topic: Consolidation working paper, first year LO 4 Portsdown Company bought all of Speedwell Company’s voting stock on January 1, 2024 for $125,000. Fair value information on Speedwell’s assets and liabilities at the date of acquisition is as follows: • • • • •
Inventories are overvalued by $5,000. Speedwell uses FIFO to report its inventories, and acquisition-date inventories were sold in 2024. Property and equipment is overvalued by $20,000. P&E has a 10-year remaining life, straight-line. Liabilities are understated by $500. Assume a 5-year remaining life, and straight-line amortization of any premium/discount. Previously unreported identifiable intangibles are valued at $35,000. These intangibles have indefinite lives, but testing reveals impairment of $3,000 in 2024. Goodwill reported for this acquisition is not impaired in 2024.
Portsdown uses the complete equity method to account for its investment in Speedwell on its own books. Trial balances for both companies at December 31, 2024 are in the consolidation working paper that follows.
© Cambridge Business Publishers, 2023 4-62
Advanced Accounting, 5th Edition
Current assets Property and equipment, net Identifiable intangibles Investment in Speedwell
Portsdown Dr (Cr) $ 15,000 90,000 -131,790
Speedwell Dr (Cr) $ 10,000 60,000 ---
Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Accumulated OCI, Jan. 1 Sales revenue Equity in NI of Speedwell Equity in OCI of Speedwell Cost of goods sold Operating expenses Interest expense Other comprehensive income Total
-(156,600) (40,000) (29,000) (1,000) (84,000) (6,750) (40) 55,000 25,000 750 (150) $ 0
-(28,635) (15,000) (23,500) (175) (50,000) – -35,000 12,000 350 (40) $ 0
Dr
Cr
Consol Dr (Cr)
Required a. Fill in the working paper as necessary to consolidate the trial balances of the two companies. b. Compute the following consolidated balances: (1) 2024 net income (2) December 31, 2024 retained earnings (3) 2024 comprehensive income (4) December 31, 2024 accumulated other comprehensive income
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-63
ANS: a.
December 31, 2024 consolidation working paper Current assets Property and equipment, net Identifiable intangibles Investment in Speedwell Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Accumulated OCI, Jan. 1 Sales revenue Equity in NI of Speedwell Equity in OCI of Speedwell Cost of goods sold Operating expenses Interest expense Other comprehensive income Total
b.
23.
(1) (2) (3) (4)
Portsdown Dr (Cr) $ 15,000
Speedwell Dr (Cr) $ 10,000
90,000 -131,790 -(156,600) (40,000) (29,000) (1,000) (84,000) (6,750) (40) 55,000 25,000 750
$
(150) 0
$
Dr (O)
5,000
60,000 ---
(O) (R)
2,000 35,000
-(28,635) (15,000) (23,500) (175) (50,000) --35,000 12,000 350
(R) (O) (E) (E) (E)
76,825 100 15,000 23,500 175
(C) (C)
6,750 40
(40) 0
(O)
3,000
______ $167,390
Consol Dr (Cr) $ 25,000
Cr 5,000 (R) 20,000 (R) 3,000 (O) 6,790 (C) 38,675 (E) 86,325 (R)
132,000 32,000 -76,825 (185,635) (40,000) (29,000) (1,000) (134,000) --85,000 38,000 1,000
500 (R)
5,000 (O) 2,000 (O) 100 (O) _______ $167,390
$
$134,000 - $85,000 - $38,000 - $1,000 = $10,000 $29,000 + $10,000 = $39,000 $10,000 + $190 = $10,190 $1,000 + $190 = $1,190
Topic: Consolidation working paper, second year LO 4 Powerplan Industries bought Springfield Inc.’s voting stock on January 1, 2023 for $42,000, when Springfield’s book value was $8,000. Fair value information on Springfield’s assets and liabilities at the date of acquisition is as follows: • • •
Property and equipment is overvalued by $7,000. P&E has a 10-year remaining life, straightline. Previously unreported identifiable intangibles are valued at $8,000. These intangibles have indefinite lives, but testing reveals impairment of $2,000 in 2023 and $1,000 impairment in 2024. Goodwill reported for this acquisition is not impaired in 2023, but is impaired by $3,000 in 2024.
Powerplan uses the complete equity method to account for its investment in Springfield on its own books. It is now December 31, 2024, two years since the acquisition. The consolidation working paper at December 31, 2024 follows.
© Cambridge Business Publishers, 2023 4-64
Advanced Accounting, 5th Edition
(190) 0
Current assets Property & equipment, net Identifiable intangibles Investment in Springfield Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Treasury stock Dividends Sales revenue Equity in NI of Springfield Cost of goods sold Operating expenses Total
Powerplan Dr (Cr) $ 15,000 90,000 -44,900
Springfield Dr (Cr) $ 10,000 63,000 ---
-(76,200) (40,000) (30,000) 2,000 -(84,000) (1,700) 55,000 25,000 _______ $ 0
-(57,500) (5,000) (6,100) 100 500 (50,000) – 30,000 15,000 _______ $ 0
Dr
Cr
Consol Dr (Cr)
Required a. Prepare a schedule calculating the initial value of goodwill for this acquisition. b. Calculate Powerplan’s equity in net income of Springfield for 2024. c. Fill in the consolidation working paper as necessary to consolidate the trial balances of the two companies at December 31, 2024. ANS: a.
Acquisition cost Book value, date of acquisition Excess Fair value – book value: Plant and equipment, net Identifiable intangibles Goodwill
b.
Springfield’s 2024 reported net income Revaluation write-offs: P&E depreciation Identifiable intangibles impairment loss Goodwill impairment loss Equity in net income
Test Bank, Chapter 4
$ 42,000 (8,000) 34,000 $ (7,000) 8,000
1,000 $ 33,000
$ 5,000 700 (1,000) (3,000) $ 1,700
© Cambridge Business Publishers, 2023 4-65
c.
December 31, 2024 consolidation working paper Powerplan Dr (Cr) $ 15,000
Springfield Dr (Cr) $ 10,000
90,000 -44,900
63,000 ---
(O) (R)
700 6,000
Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Treasury stock Dividends Sales revenue Equity in NI of Springfield Cost of goods sold Operating expenses
-(76,200) (40,000) (30,000) 2,000 -(84,000) (1,700) 55,000 25,000
-(57,500) (5,000) (6,100) 100 500 (50,000) -– 30,000 15,000
(R)
33,000
(E) (E)
5,000 6,100
Total
$
$
Current assets Property & equipment, net Identifiable intangibles Investment in Springfield
© Cambridge Business Publishers, 2023 4-66
0
0
Dr
Cr
6,300 (R) 1,000 (O) 1,200 (C) 11,000 (E) 32,700 (R) 3,000 (O)
100 (E) 500 (C) (C)
1,700
(O) (O)
1,000 3,000 $56,500
700 (O) _____ $56,500
Consol Dr (Cr) $ 25,000 147,400 5,000 -30,000 (133,700) (40,000) (30,000) 2,000 -(134,000) -85,000 43,300 _______ $ 0
Advanced Accounting, 5th Edition
24.
Topic: Consolidation working paper, fourth year LO 1, 4 On January 2, 2021, Putney Industries acquired all of Steico Corporation’s voting stock for $12,000. Steico’s book value at the date of acquisition was $6,000. Steico’s reported assets and liabilities had book values that approximated fair value at the date of acquisition, but it had previously unreported identifiable intangible assets (5-year life, straight-line) valued at $800. It is now December 31, 2024, four years after the date of acquisition. No impairment losses have occurred since acquisition for any revaluations. December 31, 2024 trial balances for Putney and Steico are shown in the consolidation working paper that follows.
Current assets Fixed assets, net ID intangibles Investment in Steico Goodwill Liabilities Capital stock Retained earnings, Jan. 1 AOCI, Jan. 1 Sales revenue Equity in NI—Steico Equity in OCI —Steico Cost of goods sold Operating expenses Other comprehensive income Total
Putney Dr (Cr) $ 3,030 49,300 -15,060
Steico Dr (Cr) $ 2,500 24,200 ---
-(22,000) (15,000) (27,900) (600) (25,000) (840) (50) 20,000 4,000
-(17,000) (500) (8,000) (150) (12,000) --8,000 3,000
________-$ 0
$
Dr
Cr
Consol. Dr (Cr)
(50) 0
Required a. Calculate 2024 equity in net income of Steico, reported on Putney’s separate books. Putney uses the complete equity method to account for its investment in Steico. b. Calculate the December 31, 2024 balance for Investment in Steico, reported on Putney’s separate books. c. Fill in the eliminating entries (C), (E), (R), and (O) to consolidate the accounts of the two companies at December 31, 2024, using the consolidation working paper. d. Present Putney’s consolidated statement of income and comprehensive income for 2024, and its consolidated balance sheet at December 31, 2024.
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-67
ANS: a.
b.
Steico’s reported net income Amortization expense $800/5 Equity in net income of Steico
$ 1,000 (160) $ 840
Acquisition cost Change in Steico’s RE and AOCI to beginning of 2024 (1) Revaluation write-off to beginning of 2024 (2) Investment, beginning of 2024 Equity in NI for 2024 Equity in OCI for 2024 Investment, end of 2024 (1) $500 + $8,000 + $150 - $6,000 = $2,650 (2) ($800/5) x 3 = $480
$12,000 2,650 (480) 14,170 840 50 $15,060
c. Current assets Fixed assets, net ID intangibles Investment in Steico Goodwill Liabilities Capital stock Retained earnings, Jan. 1 AOCI, Jan. 1 Sales revenue Equity in NI of Steico Equity in OCI of Steico Cost of goods sold Operating expenses Other comprehensive income Total
Putney Dr (Cr) $ 3,030 49,300 -15,060
Steico Dr (Cr) $ 2,500 24,200 -- (R) --
-(22,000) (15,000) (27,900) (600) (25,000) (840) (50) 20,000 4,000
-- (R) (17,000) (500) (E) (8,000) (E) (150) (E) (12,000) -- (C) -- (C) 8,000 3,000 (O)
5,200
(50) 0
___ $15,220
__ $
-0
$
Dr
Consol Dr (Cr) $ 5,530 73,500 160 --
Cr
320
160 (O) 890 (C) 8,650 (E) 5,520 (R)
5,200 (39,000) (15,000) (27,900) (600) (37,000) --28,000 7,160
500 8,000 150 840 50 160 _______ $15,220
$
d. Consolidated Statement of Comprehensive Income for 2024 Sales revenue Cost of goods sold Gross margin Operating expenses Net income Other comprehensive income Comprehensive income
© Cambridge Business Publishers, 2023 4-68
$ 37,000 (28,000) 9,000 (7,160) 1,840 50 $ 1,890
Advanced Accounting, 5th Edition
(50) 0
Assets Current assets Fixed assets, net Identifiable intangibles Goodwill
Total assets
Consolidated Balance Sheet December 31, 2024 Liabilities $ 5,530 73,500 Equity 160 Capital stock 5,200 Retained earnings (3) AOCI (4) ________ Total equity $ 84,390 Total liabilities & equity
$ 39,000
15,000 29,740 650 45,390 $ 84,390
(3) $27,900 + $1,840 = $29,740 (4) $600 + $50 = $650
25.
Topic: Consolidation working paper, sixth year LO 4 Pyroplex Corporation acquires the voting stock of Systembox Co. on January 1, 2019 at an acquisition cost of $15,300. Systembox’s trial balance at the date of acquisition is as follows, along with fair value information for its identifiable net assets: Systembox trial balance, January 1, 2019 (in thousands) Current assets Plant & equipment Patents Customer order backlog Trademarks Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings Total
Book Value Dr (Cr)
Fair Value Dr (Cr)
$
$
300 5,000 0 0 0 (200) (1,400) (400) (2,000) (1,300) $ 0
300 2,000 5,000 2,500 1,000 (200) (1,300)
Goodwill connected with this acquisition is $6,000. As of January 1, 2019, the revaluations have the following estimated lives (all straight-line): Plant & equipment Patents Customer order backlog Trademarks Goodwill Long-term liabilities
20 years 10 years 5 years 10 years Impairment to beginning of 2024: $200 Impairment in 2024: none 5 years
Pyroplex uses the complete equity method to account for its investment in Systembox on its own books. The December 31, 2024 trial balances for Pyroplex and Systembox (six years after acquisition) appear in the consolidation working paper provided. Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-69
Pyroplex Dr (Cr) Current assets Plant & equipment, net Patents Investment in Systembox
Customer order backlog Trademarks Goodwill Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings, Jan. 1 Dividends Sales revenue Equity in net income of Systembox Cost of goods sold Operating expenses Total
$ 4,200 260,000
Systembox Dr (Cr) $
Dr
Cr
Consol. Dr (Cr)
650 20,000
17,600
(11,300)
(250)
(152,850) (4,000) (40,000) (70,000) 800 (25,000)
(8,900) (400) (2,000) (7,300) 100 (10,000)
(1,450) 15,000 7,000 $ 0
6,000 2,100 $ 0
Required a. Fill in the consolidation working paper as necessary to consolidate the trial balances of Pyroplex and Systembox at December 31, 2024. b. Present the 2024 consolidated income statement and the December 31, 2024 consolidated balance sheet, in good form.
© Cambridge Business Publishers, 2023 4-70
Advanced Accounting, 5th Edition
ANS: a. Current assets
Pyroplex Dr (Cr) $ 4,200
Systembox Dr (Cr) $ 650
Plant & equipment, net
260,000
20,000
Patents Investment in Systembox
Dr
Consol Dr (Cr)
Cr
$ 4,850 (O)
150
2,250 (R)
277,900
(R)
2,500
500 (O) 1,350 (C) 9,700 (E) 6,550 (R)
2,000 --
17,600
Customer order backlog
--
Trademarks Goodwill
(R)
500
(R)
5,800
100 (O)
400 5,800
Current liabilities
(11,300)
(250)
(11,550)
Long-term liabilities
(152,850)
(8,900)
(161,750)
Common stock
(4,000)
(400)
(E)
400
(4,000)
Additional paid-in capital
(40,000)
(2,000)
(E)
2,000
(40,000)
Retained earnings, Jan. 1
(70,000) 800 (25,000)
(7,300) 100 (10,000)
(E)
7,300
Dividends Sales revenue Equity in net income of Systembox Cost of goods sold Operating expenses Total
(1,450) 15,000 7,000 $ 0
6,000 2,100 $ 0
100 (C)
(C)
1,450
(O)
450 $20,550
______ $20,550
(70,000) 800 (35,000) -21,000 9,550 $ 0
b. Consolidated Income Statement for 2024 Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 35,000 (21,000) 14,000 (9,550) $ 4,450 Consolidated Balance Sheet December 31, 2024
Assets Current assets Plant & equipment, net Identifiable intangible assets Goodwill
Total assets
$ 4,850 277,900 2,400 5,800
________ $290,950
Liabilities & equity Current liabilities Long-term liabilities Total liabilities
$ 11,550 161,750 173,300
Common stock Add’l paid-in capital Retained earnings (1) Total equity Total liabilities and equity
4,000 40,000 73,650 117,650 $290,950
(1) $70,000 + $4,450 - $800 = $73,650 Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-71
26.
Topic: Identifiable intangibles impairment testing, IFRS LO 5 In its acquisition of Spitfire Company on January 1, 2023, Philips Industries identifies the following intangibles belonging to Spitfire but not reported on its books. All are separately capitalized per ASC Topic 805.
Licensing agreements Brand names Customer lists
Fair Value, January 1, 2023 $ 800 5,000 20,000
Useful Life 5 years, SL Indefinite 4 years, SL
Philips follows IFRS and is consolidating Spitfire at December 31, 2025 (3 years after the acquisition). No impairment losses were reported on the licensing agreements or customer lists in 2023 or 2024. An impairment loss of $1,000 was reported on the brand names in 2024. On December 31, 2025, the following information is available: Intangible Asset Licensing agreements Brand names Customer lists
Total Expected Future Cash Inflows, Undiscounted $ 350 3,000 5,100
Total Expected Future Cash Inflows, Discounted $ 280 2,500 4,200
Required What is the impairment loss for the identifiable intangibles for 2025, following IFRS? ANS:
Licensing agreements Brand names Customer lists Total impairment loss 27.
Book Value, December 31, 2025 $ 320 4,000 5,000
Fair Value, December 31, 2025 $ 280 2,500 4,200
Impairment Loss $ 40 1,500 800 $2,340
Topic: Goodwill impairment testing, IFRS and U.S. GAAP LO 3, 5 At the end of 2024, you are evaluating the goodwill of TeliaSonera, a company headquartered in Sweden, which uses IFRS. The amount of goodwill originally allocated to cash generating units, and goodwill impairment recognized through 2023 (in millions of Swedish krona, or SEK) are: Cash Generating Unit Mobility services Finland Mobility services Norway Broadband services Finland Eurasia Azerbaijan Eurasia Uzbekistan Total
© Cambridge Business Publishers, 2023 4-72
Original Goodwill SEK 20,000 25,000 10,000 5,000 2,500 SEK 62,500
Total Impairment Through 2023 SEK 0 7,000 2,000 0 500 SEK 9,500
Advanced Accounting, 5th Edition
Information on the CGUs as of 31 December 2024 (in millions of SEK): 31 Dec. 2024 31 Dec. 2024 Cash Generating Unit Fair Value of CGU Book Value of CGU Mobility services Finland SEK 100,000 SEK 110,000 Mobility services Norway 60,000 40,000 Broadband services Finland 16,000 12,000 Eurasia Azerbaijan 30,000 33,000 Eurasia Uzbekistan 20,000 21,000 Required (all amounts are in millions of SEK) a. What is TeliaSonera’s total goodwill impairment loss for 2024, following IFRS? b. TeliaSonera wants to know what its goodwill impairment loss would be for 2024, if it followed U.S. GAAP. Below is reporting unit information. Reporting Unit Mobility services Broadband services Eurasia Total
Original Goodwill SEK 45,000 10,000 7,500 SEK 62,500
Total Impairment Through 2023 SEK 7,000 2,000 500 SEK 9,500
Reporting Unit Mobility services Broadband services Eurasia
31 Dec. 2024 Fair Value of Unit SEK 160,000 16,000 50,000
31 Dec. 2024 Book Value of Unit SEK 150,000 12,000 54,000
Calculate TeliaSonera’s goodwill impairment loss for 2024, following U.S. GAAP. Assume that TeliaSonera skips the qualitative evaluation of goodwill. ANS: a.
Mobility services Finland Mobility services Norway Broadband services Finland Eurasia Azerbaijan Eurasia Uzbekistan Total impairment loss
Potential Loss = BV – FV of CGU SEK 10,000 FV>BV FV>BV 3,000 1,000
Exceeds BV of GW? no --no no
Potential Loss = BV – FV of CGU FV>BV FV>BV SEK 4,000
Exceeds BV of GW? --no
Loss SEK 10,000 --3,000 1,000 SEK 14,000
b.
Mobility services Broadband services Eurasia Total impairment loss Test Bank, Chapter 4
Loss --SEK 4,000 SEK 4,000
© Cambridge Business Publishers, 2023 4-73
28.
Topic: Goodwill impairment testing, U.S. GAAP and IFRS LO 3, 5 A company reports total goodwill of $4,000. On December 31, 2024, the following information is available for the reporting units of a company: North American Division $ 1,000 8,000 8,700
Book value of goodwill Fair value of division Book value of division
International Division $ 3,000 6,000 5,800
Required a. Management determines that it is more likely than not that book value exceeds fair value for both reporting units. What is the amount of goodwill impairment loss for 2024, following U.S. GAAP? b. Now assume the company follows IFRS and allocates the $4,000 in goodwill to the following cash generating units.
Book value of goodwill Fair value of division Book value of division
North American CGU $ 1,000 8,000 8,700
South American CGU $ 2,500 4,000 3,600
Asian CGU $ 500 2,000 2,200
What is the amount of goodwill impairment loss for 2024, following IFRS? ANS: a. NA Division Fair value $8,000 Book value 8,700 Potential GW impairment 700 Exceeds reported GW? No Actual GW impairment $ 700 Total goodwill impairment = $700
Int’l Division $6,000 5,800 None N/A $ 0
b. NA CGU Fair value $8,000 Book value 8,700 Potential GW impairment 700 Exceeds reported GW? No Actual GW impairment $ 700 Total goodwill impairment = $700 + $200 = $900
© Cambridge Business Publishers, 2023 4-74
SA CGU $4,000 3,600 None N/A $ 0
Asian CGU $2,000 2,200 200 No $ 200
Advanced Accounting, 5th Edition
29.
Topic: Consolidation eliminating entries, second year, cost method LO 6 Panaz Company acquires the voting stock of Sydney Company for $40,000 in cash on January 1, 2024. Panaz accounts for its investment using the cost method. Sydney’s shareholders’ equity at the date of acquisition was $2,500, consisting of capital stock of $1,900 and retained earnings of $600. The $37,500 excess of acquisition cost over book value is attributed as follows: Inventories $ 300 FIFO, sold in 2024 Plant & equipment 2,000 5-year life, straight-line ID intangibles 4,000 4-year life, straight-line Goodwill 31,200 Impaired by $50 in 2025 Total $37,500 It is now December 31, 2025. Sydney’s retained earnings at the beginning of 2025 was $2,500. Sydney reported net income of $1,800 and declared and paid dividends of $100 in 2025. Required Prepare the eliminating entries (C), (A), (E), (R), and (O), in journal form, necessary to consolidate the financial statements of Panaz and Sydney at December 31, 2025. ANS: The adjustment to beginning retained earnings to convert Panaz’ accounts to the complete equity method is calculated as follows: Change in Sydney retained earnings to beginning of year ($2,500 – $600) One year of revaluation write-offs: Increase in cost of goods sold Increase in depreciation expense ($2,000/5) Increase in amortization expense ($4,000/4) Credit to beginning retained earnings (C) Dividend income
$ 1,900 (300) (400) (1,000) $ 200 100
Dividends
100
(A) Investment in Sydney
200 Retained earnings, Jan 1
(E) Capital stock Retained earnings, 1/1
200
1,900 2,500 Investment in Sydney
(R) Plant & equipment, net Identifiable intangibles Goodwill
4,400
1,600 3,000 31,200 Investment in Sydney
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-75
35,800
(O) Depreciation expense Amortization expense Goodwill impairment loss
400 1,000 50 Plant & equipment, net Identifiable intangibles Goodwill
30.
400 1,000 50
Topic: Consolidation eliminating entries, third year, cost method LO 6 Panel Corporation acquired the voting stock of Shutter Company on January 1, 2023 for $15,000 in cash and stock. Shutter’s equity at the date of acquisition consisted of $1,000 in capital stock, a retained deficit of $300, and accumulated other comprehensive income of $50. Shutter’s net assets were reported at amounts approximating fair value, but Panel’s accountants identified the following unreported intangibles, capitalized per ASC Topic 805: Fair Value 1,000 2,250
Internet domain name Customer order backlog
Both intangibles are straight-line amortized over five years. There is no goodwill impairment in the first three years following acquisition. Shutter declared no dividends in 2025. Its shareholders’ equity at January 1, 2025 consists of $1,000 in capital stock, retained earnings of $1,200, and accumulated other comprehensive income of $65. Panel uses the cost method to report its investment in Shutter on its own books. Required a. Calculate goodwill arising from this acquisition. b. Prepare the consolidation working paper eliminating entries (A), (E), (R), and (O) for 2025, in journal form. ANS: Calculation of goodwill: Acquisition cost Book value Excess of cost over book value Revaluations: Internet domain name Customer order backlog Goodwill
$15,000 750 14,250 1,000 2,250
3,250 $11,000
Calculation of the amount needed to adjust Panel’s accounts to the complete equity method: Change in Shutter’s retained earnings to beginning of year ($300 + $1,200) $1,500 Identifiable intangibles write-off [$3,250/5] x 2 (1,300) Credit to retained earnings $ 200 Adjustment to AOCI = $65 - $50 = $15 credit
© Cambridge Business Publishers, 2023 4-76
Advanced Accounting, 5th Edition
(A) Investment in Shutter
215 Retained earnings, 1/1 AOCI, 1/1
(E) Capital stock Retained earnings, 1/1 AOCI, 1/1
200 15
1,000 1,200 65 Investment in Shutter
(R) Identifiable intangibles (1) Goodwill (1)
2,265
1,950 11,000
Investment in Shutter $3,250 – (($3,250/5) x 2) = $1,950
(O) Amortization expense
12,950
650 Identifiable intangibles
31.
650
Topic: Consolidation eliminating entries, fourth year, cost method LO 6 Premier Industries paid $50,000 for the voting stock of Simon Company, on July 1, 2020, the beginning of the fiscal year. At the date of acquisition, Simon’s book value was $15,000, consisting of $3,000 in capital stock, $12,200 in retained earnings, and $200 in accumulated other comprehensive loss. The $35,000 excess of acquisition cost over book value was attributed to $5,000 in indefinite life identifiable intangible assets and $30,000 in goodwill. It is now June 30, 2024. Simon’s retained earnings at the beginning of fiscal 2024 was $17,000, and its beginning accumulated other comprehensive loss was $150. Identifiable intangibles impairment to the beginning of fiscal 2024 was $800 and goodwill impairment to the beginning of fiscal 2024 was $600. Identifiable intangibles impairment in fiscal 2024 was $100 and there was no goodwill impairment. Simon declares no dividends. Premier uses the cost method to account for its investment in Simon on its own books. Required Prepare the eliminating entries (A), (E), (R), and (O), in journal form, necessary to consolidate the financial statements of Premier and Simon at June 30, 2024. ANS: The adjustment to beginning retained earnings to convert Premier’s accounts to the complete equity method is calculated as follows: Change in Simon’s retained earnings to beginning of year $17,000 – $12,200 $4,800 Revaluation write-offs to beginning of fiscal 2024: Identifiable intangibles impairment (800) Goodwill impairment (600) Credit to beginning retained earnings $3,400 Change in Simon’s AOCL to beginning of year $150 - $200 = $50 credit to AOCL
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-77
(A) Investment in Simon
3,450 Retained earnings, Jan 1 AOCL
(E) Capital stock Retained earnings, 1/1
3,400 50
3,000 17,000 AOCL Investment in Simon
150 19,850
(R) Identifiable intangibles Goodwill
4,200 29,400 Investment in Simon
33,600
(O) Impairment loss
100 Identifiable intangibles
© Cambridge Business Publishers, 2023 4-78
Advanced Accounting, 5th Edition
100
32.
Topic: Consolidation eliminating adjustment, third year, cost method LO 6 Propyl Corporation acquired the voting stock of Systoc Company on January 1, 2023 at an acquisition cost of $40,000. Systoc’s equity at the date of acquisition consisted of $5,000 in capital stock, retained earnings of $8,000, and accumulated other comprehensive income of $200. Systoc’s net assets were reported at amounts approximating fair value, but unreported indefinite life identifiable intangibles, capitalized per ASC Topic 805 were valued at $10,000. The identifiable intangibles are impaired by $1,000 in 2023 and $500 in 2024. Half of the goodwill was written off as of the beginning of 2025. Systoc declared no dividends in 2025. Its shareholders’ equity at January 1, 2025 consists of $5,000 in capital stock, retained earnings of $20,000, and accumulated other comprehensive income of $140. Propyl uses the cost method to report its investment in Systoc on its own books. Required You are preparing the consolidation working paper at December 31, 2025. Prepare the entry (A) needed to adjust Propyl’s accounts to the complete equity method, before doing consolidation eliminating entries (E), (R), and (O). ANS: Change in RE to beginning of 2025 $20,000 - $8,000 = Intangibles write-off to beginning of 2025 $1,000 + $500 = Goodwill write-off to beginning of 2025 (1) $16,800 x ½ Adjustment to RE, 1/1 (1) $16,800 = $40,000 – ($5,000 + $8,000 + $200) - $10,000.
$12,000 (1,500) (8,400) $ 2,100
Adjustment to AOCI, 1/1 = $140 - $200 = $(60). (A) Investment in Systoc AOCI, 1/1
2,040 60 Retained earnings, 1/1
Test Bank, Chapter 4
© Cambridge Business Publishers, 2023 4-79
2,100
TEST BANK CHAPTER 5 Consolidated Financial Statements: Outside Interests MULTIPLE CHOICE 1.
2.
3.
Topic: Goodwill allocation at the date of acquisition LO 1 Peters Inc. paid $400 in cash and $6,000 fair value of stock to acquire 65% of the voting stock of Stony Company. Stock registration fees were $100 and outside consulting fees were $50. Peters also agreed to an earnout, valued at $85, whereby additional cash will be paid to the former shareholders of Stony if certain performance goals are reached. The fair value of the noncontrolling interest was $3,415. Stony’s book value was $2,000 at the date of acquisition, and revaluations consisted of previously unrecorded intangible assets valued at $6,900. What percentage of the total goodwill is allocated to Peters? a. b. c. d.
68% 70% 73% 75%
ANS:
b Acquisition cost = $6,000 + $400 + $85 = $6,485 Total goodwill = $6,485 + $3,415 - $2,000 - $6,900 = $1,000 Goodwill to the controlling interest = $6,485 – (65% x $8,900) = $700, or 70%
Topic: Valuation of noncontrolling interest LO 1 Which method is most appropriate for valuing a noncontrolling interest at the date of acquisition? a. b. c. d.
Stock price of the acquired company in an active market. Stock price of the acquiring company in an active market. Capitalization of the acquired company’s future cash flows. Capitalization of the acquired company’s future cash flows plus a control premium.
ANS:
a
Topic: Goodwill allocation at date of acquisition LO 1 Palco acquires 80% of the voting stock of Sidney at an acquisition cost of $5,760. The noncontrolling interest is valued at $1,240. Sidney’s book value at the date of acquisition is $5,000, and there are no revaluations of Sidney’s identifiable net assets. What percentage of the goodwill is allocated to the controlling interest? a. b. c. d.
None 82% 86% 88%
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-1
ANS:
4.
5.
6.
d Total goodwill = $5,760 + $1,240 - $5,000 = $2,000 Allocation to controlling interest = $5,760 – (80% x $5,000) = $1,760/$2,000 = 88%
Topic: Goodwill to noncontrolling interest at the date of acquisition LO 1 A company pays $70 million in cash to acquire 70% of the voting stock of another company. The fair value of the noncontrolling interest at the date of acquisition is $25 million, and the book value of the acquired company is $20 million. There are no revaluations of the acquired company’s identifiable net assets. Goodwill to the noncontrolling interest is: a. b. c. d.
$0 $19 million $22.5 million $15 million
ANS:
b Total goodwill = $70 million + $25 million - $20 million = $75 million Goodwill to the controlling interest = $70 million – (70% x $20 million) = $56 million Goodwill to the noncontrolling interest = $75 million - $56 million = $19 million
Topic: Goodwill to controlling interest at the date of acquisition LO 1 A company pays $130,500 in cash and stock to acquire 75% of the voting stock of another company. The fair value of the noncontrolling interest is $39,500, and the fair value of the acquired company’s identifiable net assets is $70,000. What percentage of total goodwill is allocated to the controlling interest? a. b. c. d.
76% 77% 78% 80%
ANS:
c Total goodwill = $130,500 + $39,500 - $70,000 = $100,000 Goodwill to controlling interest = $130,500 – (75% x $70,000) = $78,000, or 78%
Topic: Goodwill allocation with noncontrolling interest LO 1 Pratt Company buys 65% of the voting stock of Sully Corporation at a 40% premium over the market price of Sully’s stock. Which statement is most likely to be true concerning the goodwill resulting from this acquisition? a. b. c. d.
Goodwill is allocated 60% to Pratt and 40% to the noncontrolling interest in Sully. All goodwill is allocated to the noncontrolling interest in Sully. Goodwill is allocated 65% to Pratt and 35% to the noncontrolling interest in Sully. The goodwill allocation to Pratt is more than 65% of the total goodwill.
ANS:
d
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Advanced Accounting, 5th Edition
Use the following information to answer Questions 7 and 8. A company pays $50,000 in cash and stock to acquire 65% of the voting stock of another company. The fair value of the 35% noncontrolling interest in the acquired company is $12,000. The book value of the acquired company is $25,000. At the date of acquisition, the acquired company’s plant assets are overvalued by $6,000 and it has previously unreported identifiable intangible assets valued at $10,000. 7.
8.
Topic: Goodwill calculation with noncontrolling interest LO 1 What is the total amount of goodwill recognized for this acquisition? a. b. c. d.
$37,000 $11,000 $33,000 $21,000
ANS:
c $50,000 + $12,000 – ($25,000 - $6,000 + $10,000) = $33,000
Topic: Goodwill to noncontrolling interest LO 1 What is the amount of goodwill allocated to the noncontrolling interest at the date of acquisition? a. b. c. d.
$1,850 $2,150 $8,150 none
ANS:
a $50,000 – (($25,000 - $6,000 + $10,000) x 65%) = $31,150 $33,000 - $31,150 = $1,850
Use the following information to answer Questions 9 and 10. A parent acquired 90% of the voting stock of a subsidiary for $20,000. The fair value of the noncontrolling interest was $2,000. The subsidiary’s book value at the date of acquisition was $1,000. Following is revaluation information for the subsidiary’s identifiable net assets at the date of acquisition:
Inventories Equipment Identifiable intangibles
Test Bank, Chapter 5
Fair Value – Book Value $ (400) (10,000) 16,000
©Cambridge Business Publishers, 2023 5-3
9.
10.
Topic: Consolidated goodwill, noncontrolling interest, date of acquisition LO 1 What is total consolidated goodwill at the date of acquisition, following U.S. GAAP? a. b. c. d.
$14,400 $13,400 $15,400 $16,400
ANS:
c
Acquisition cost Noncontrolling interest Total fair value Book value Revaluations: Inventories Equipment Identifiable intangibles Goodwill
$ 1,000 (400) (10,000) 16,000
$20,000 2,000 22,000
6,600 $15,400
Topic: Consolidated goodwill, noncontrolling interest, date of acquisition LO 1 What is the amount of consolidated goodwill attributed to the noncontrolling interest at the date of acquisition, following U.S. GAAP? a. b. c. d.
$0 $1,340 $1,540 $1,440
ANS:
b Goodwill to the controlling interest = $20,000 – (90% x $6,600) = $14,060 Goodwill to the noncontrolling interest = $15,400 - $14,060 = $1,340
Use the following information to answer Questions 11 – 15. A company issues new stock with a fair value of $140,000 to acquire 90% of the voting stock of another company. The fair value of the noncontrolling interest at the date of acquisition is $12,000, and the book value of the acquired company is $15,000. The new subsidiary’s net assets are reported at amounts approximating fair value at the date of acquisition, except that its plant assets are overvalued by $30,000, its reported license agreements are undervalued by $60,000, and it has previously unreported identifiable intangible assets with a fair value of $40,000. 11.
Topic: Goodwill at the date of acquisition LO 1 What is the total reported goodwill on this acquisition, following U.S. GAAP? a. b. c. d.
$ 9,500 $55,000 $67,000 none
©Cambridge Business Publishers, 2023 5-4
Advanced Accounting, 5th Edition
ANS:
12.
13.
14.
c Acquisition cost Fair value of noncontrolling interest Total FV of IDNA: Book value Revalued plant assets Revalued license agreements ID intangible assets Goodwill
$ 140,000 12,000 152,000 $ 15,000 (30,000) 60,000 40,000
85,000 $ 67,000
Topic: Goodwill to the noncontrolling interest at the date of acquisition LO 1 What is the goodwill to the noncontrolling interest, following U.S. GAAP? a. b. c. d.
$3,500 $1,850 $6,700 $0
ANS:
a Goodwill to controlling interest = $140,000 – (90% x $85,000) = $63,500 Goodwill to noncontrolling interest = $67,000 - $63,500 = $3,500
Topic: Noncontrolling interest valuation at the date of acquisition LO 1 At what value does the noncontrolling interest appear on the date-of-acquisition consolidated balance sheet, following U.S. GAAP? a. b. c. d.
$12,000 $15,500 $ 8,500 $ 4,500
ANS:
a The noncontrolling interest is valued at its fair value at the date of acquisition.
Topic: Goodwill valuation at the date of acquisition, IFRS alternative LO 4 At what amount is goodwill valued at the date of acquisition, following the alternative method allowed by IFRS? a. b. c. d.
$56,950 $62,150 $63,500 $67,000
ANS:
c Only the parent’s goodwill is recognized.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-5
15.
16.
Topic: Noncontrolling interest valuation at the date of acquisition, IFRS alternative LO 4 At what amount is the noncontrolling interest valued at the date of acquisition, following the alternative method allowed by IFRS? a. b. c. d.
$12,000 $ 8,500 $ 4,500 $ 6,150
ANS:
b 10% x $85,000 = $8,500
Topic: Noncontrolling interest valuation at the date of acquisition, U.S. GAAP LO 1 How is the noncontrolling interest in a subsidiary valued at the date of acquisition, following U.S. GAAP? a. b. c. d. ANS:
17.
18.
Fair value at the date of acquisition The noncontrolling interest’s share of the fair value of the subsidiary’s identifiable net assets at the date of acquisition The noncontrolling interest’s share of the book value of the subsidiary at the date of acquisition The noncontrolling interest’s share of the book value of the subsidiary at the date of acquisition plus its share of date-of-acquisition goodwill a
Topic: Valuation of noncontrolling interest, U.S. GAAP LO 1 Following U.S. GAAP, a 20% noncontrolling interest in a subsidiary is reported on the consolidated balance sheet at the date of acquisition at what amount? a. b. c. d.
20% of the subsidiary’s book value 20% of the fair value of the subsidiary’s identifiable net assets 20% of the acquisition price paid by the parent The fair value of the noncontrolling interest
ANS:
d
Topic: Noncontrolling interest valuation at the date of acquisition, U.S. GAAP LO 1 What is the preferred way to value the noncontrolling interest in a subsidiary at the date of acquisition, per U.S. GAAP? a. b. c. d.
Level 3 measurement of the expected present value of future dividends paid to the noncontrolling interest The stock price of noncontrolling shares in an active market The appraised market value of the noncontrolling interest’s share of the subsidiary’s assets less liabilities The stock price of noncontrolling shares in an active market, discounted for lack of control
©Cambridge Business Publishers, 2023 5-6
Advanced Accounting, 5th Edition
ANS: 19.
20.
Topic: Display of noncontrolling interest on consolidated balance sheet LO 1 Noncontrolling interest is reported on the consolidated balance sheet as: a. b. c. d.
A noncurrent tangible asset account An identifiable intangible asset account A noncurrent liability account An equity account
ANS:
d
Topic: Display of noncontrolling interest on consolidated balance sheet LO 1 Noncontrolling interest is reported in the equity section of the consolidated balance sheet: a.
c. d.
In separate lines representing the noncontrolling interest’s share of the consolidated entity’s shareholders’ equity accounts (capital stock, retained earnings, etc.) In two separate lines representing the noncontrolling interest’s share of (1) the consolidated entity’s stock accounts and (2) retained earnings and accumulated other comprehensive income accounts As one line as a component of consolidated shareholders’ equity As one line, as a contra to total consolidated shareholders’ equity
ANS:
c
b.
21.
Topic: Goodwill valuation with noncontrolling interest, U.S. GAAP LO 1 A parent acquires 80% of the voting stock of its subsidiary. Following U.S. GAAP, on the consolidated balance sheet less than 20% of the total goodwill will likely be allocated to the noncontrolling interest because: a. b.
22.
b
c. d.
U.S. GAAP allows companies the option of only recognizing the parent’s share of goodwill. The price per share of the noncontrolling interest’s stock reflects a premium over the price per share paid by the parent. U.S. GAAP does not allow goodwill to be allocated to the noncontrolling interest. The parent usually pays a higher price per share because it acquires a controlling interest.
ANS:
d
Topic: Consolidated balance sheet, noncontrolling interest, date of acquisition LO 1 A parent owns 90% of a subsidiary’s voting stock. On the consolidated balance sheet at the date of acquisition, at what value are total consolidated liabilities reported? a. b. c. d.
The parent’s book value of liabilities. The parent’s fair value of liabilities plus the subsidiary’s fair value of liabilities. The parent’s book value of liabilities plus the subsidiary’s fair value of liabiities. The parent’s book value of liabilities plus 90% of the subsidiary’s fair value of liabilities.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-7
ANS: 23.
Topic: Consolidation eliminating entries at acquisition date LO 1 A subsidiary has a 20% noncontrolling interest. At the date of acquisition, eliminating entry (E) recognizes what part of the noncontrolling interest? a. b. c.
24.
c
d.
The noncontrolling interest’s share of the subsidiary’s book value The fair value of the noncontrolling interest The noncontrolling interest’s share of the revaluations of the subsidiary’s identifiable net assets The noncontrolling interest’s share of the subsidiary’s fair value
ANS:
a
Topic: Consolidation eliminating entries at acquisition date LO 1 A subsidiary has a 20% noncontrolling interest. At the date of acquisition, eliminating entry (R) recognizes what part of the noncontrolling interest? a. b. c. d.
The noncontrolling interest’s share of the subsidiary’s book value The noncontrolling interest’s share of the revaluations of the subsidiary’s net assets The noncontrolling interest’s share of the revaluations of the subsidiary’s identifiable net assets The noncontrolling interest’s share of the subsidiary’s fair value
ANS:
b
Use the following information to answer Questions 25 – 27. Playco acquires 70% of Sunny’s voting stock at an acquisition cost of $100,000. The 30% noncontrolling interest has an estimated fair value of $38,000. Sunny’s identifiable net assets are carried at amounts approximating fair value at the date of acquisition. Sunny’s total shareholders’ equity is $110,000. 25.
Goodwill at acquisition date LO 1 Total goodwill recognized at the date of acquisition is a. b. c. d.
$23,000 $10,000 $25,000 $28,000
ANS:
d $100,000 + $38,000 - $110,000 = $28,000
©Cambridge Business Publishers, 2023 5-8
Advanced Accounting, 5th Edition
26.
27.
Consolidation eliminating entries at acquisition date LO 1 When consolidating the accounts of Playco and Sunny at the date of acquisition, the credit to noncontrolling interest in eliminating entry (E) is a. b. c. d.
$28,000 $30,000 $33,000 $38,000
ANS:
c $110,000 x 30% = $33,000
Consolidation eliminating entries at acquisition date LO 1 When consolidating the accounts of Playco and Sunny at the date of acquisition, the credit to noncontrolling interest in eliminating entry (R) is a. b. c. d.
$10,000 $ 8,000 $ 5,000 $0
ANS:
c NCI’s share of goodwill = $28,000 – ($100,000 – (70% x $110,000)) = $5,000; or $5,000 = $38,000 - $33,000.
Use the following information to answer Questions 28 and 29. Protec Company acquired 75% of Sussex Company’s voting stock for $40,000 in cash. The noncontrolling interest had an estimated fair value of $11,000. Some of Sussex’s identifiable assets and liabilities at the date of acquisition had fair values that were different from reported values, as follows:
Property, net Identifiable intangibles
Book Value $ 2,000 0
Fair Value $ 8,000 25,000
Sussex’s total shareholders’ equity at the date of acquisition was as follows: Capital stock Retained earnings Treasury stock Total
Test Bank, Chapter 5
$ 1,000 3,000 (100) $ 3,900
©Cambridge Business Publishers, 2023 5-9
28.
29.
Topic: Eliminating entries, date of acquisition LO 1 On a date-of-acquisition consolidation working paper, eliminating entry (E) credits Investment in Sussex in the amount of a. b. c. d.
$ 4,100 $ 2,925 $ 3,900 $ 3,075
ANS:
b
Topic: Eliminating entries, date of acquisition LO 1 On a date-of-acquisition consolidation working paper, eliminating entry (R) credits Investment in Sussex in the amount of a. b. c. d.
$35,100 $37,075 $36,100 $36,925
ANS:
b
Eliminating entries for questions 28 and 29: (E) Capital stock Retained earnings Treasury stock Investment in Sussex (75%) Noncontrolling interest in Sussex (25%) (R) Property, net Identifiable intangibles Goodwill (1)
1,000 3,000 100 2,925 975
6,000 25,000 16,100 Investment in Sussex (2) Noncontrolling interest in Sussex
37,075 10,025
(1) Goodwill = $40,000 + $11,000 – ($3,900 + $6,000 + $25,000) = $16,100. (2) Investment credit = $40,000 - $2,925 = $37,075; or (75% x ($6,000 + $25,000)) + ($40,000 – (75% x $34,900)) = $37,075
©Cambridge Business Publishers, 2023 5-10
Advanced Accounting, 5th Edition
Use the following information to answer Questions 30 – 33. Polypipe Company acquired 80% of Svedex Company’s voting stock for $95,000 in cash. The noncontrolling interest had an estimated fair value of $20,000. Some of Svedex’s identifiable assets and liabilities at the date of acquisition had fair values that were different from reported values, as follows:
Property, net Licensing agreements
Book Value $ 6,000 1,000
Fair Value $ 4,000 25,000
Svedex’s total shareholders’ equity at the date of acquisition was as follows: Capital stock Retained deficit Treasury stock Total 30.
31.
32.
$5,000 (400) (50) $ 4,550
Topic: Goodwill calculation, date of acquisition LO 1 Total goodwill from this acquisition is: a. b. c. d.
$84,450 $68,450 $87,550 $88,450
ANS:
d $95,000 + $20,000 – ($4,550 - $2,000 + $24,000) = $88,450
Topic: Goodwill allocation, date of acquisition LO 1 Goodwill allocated to the noncontrolling interest in Svedex is: a. b. c. d.
$0 $14,690 $10,690 $13,790
ANS:
b Goodwill to controlling interest = $95,000 – (80% x ($4,550 - $2,000 + $24,000)) = $73,760 Goodwill to noncontrolling interest = $88,450 - $73,760 = $14,690
Topic: Eliminating entries, date of acquisition LO 1 On a date-of-acquisition consolidation working paper, eliminating entry (E) credits Investment in Svedex in the amount of a. b. c. d.
$4,360 $3,640 $4,000 $3,980
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-11
ANS: 33.
b 80% x $4,550 = $3,640
Topic: Eliminating entries, date of acquisition LO 1 On a date-of-acquisition consolidation working paper, eliminating entry (R) credits the noncontrolling interest in Svedex in the amount of a. b. c. d.
$20,000 $15,450 $19,090 $18,600
ANS:
c 20% x ($24,000 - $2,000) + $14,690 = $19,090
Date-of-acquisition eliminating entries for questions 32 and 33 are: (E) Capital stock Retained deficit Treasury stock Investment in Svedex Noncontrolling interest in Svedex (R) Licensing agreements Goodwill Property, net Investment in Svedex Noncontrolling interest in Svedex 34.
5,000 400 50 3,640 910 24,000 88,450 2,000 91,360 19,090
Topic: Consolidation of VIE at date of acquisition LO 1 Purus Corporation has a financial relationship with Swift Financial Inc. Although Purus owns none of Swift’s voting stock, analysis determines that Swift is a variable interest entity and Purus is its primary beneficiary. How is the noncontrolling interest in Swift reported on Purus’ consolidated balance sheet at the date Purus first consolidates it, assuming Swift and Purus were already under common control? a. b. c. d. ANS:
In the equity section of the consolidated balance sheet, at Swift’s book value. As an investment account in the asset section of Purus’ consolidated balance sheet, at Swift’s book value. In the equity section of the consolidated balance sheet, at Swift’s fair value. As an investment account in the asset section of Purus’ consolidated balance sheet, at Swift’s fair value. a
©Cambridge Business Publishers, 2023 5-12
Advanced Accounting, 5th Edition
35.
Topic: Consolidation of VIE at date of acquisition LO 1 Purus Corporation has a financial relationship with Swift Financial Inc. Although Purus owns none of Swift’s voting stock, analysis determines that Swift is a variable interest entity and Purus is its primary beneficiary. How is the noncontrolling interest in Swift reported on Purus’ consolidated balance sheet at the date Purus first consolidates it, assuming Purus and Swift were not previously under common control? a. b. c. d. ANS:
36.
37.
In the equity section of the consolidated balance sheet, at Swift’s book value. As an investment account in the asset section of Purus’ consolidated balance sheet, at Swift’s book value. In the equity section of the consolidated balance sheet, at Swift’s fair value. As an investment account in the asset section of Purus’ consolidated balance sheet, at Swift’s fair value. c
Topic: Consolidation of variable interest entities LO 1 Seaton Company is a variable interest entity. Pracker Company has no equity ownership in Seaton, but is its primary beneficiary. Pracker and Seaton were not previously under common control. Which statement is true at the date Pracker becomes Seaton’s primary beneficiary? a. b. c. d.
Pracker does not consolidate Seaton. There is no consolidated noncontrolling interest. Consolidated noncontrolling interest equals the book value of Seaton’s net assets. Consolidated noncontrolling interest equals the fair value of Seaton’s net assets.
ANS:
d
Topic: Consolidation of variable interest entities LO 1 Seaton Company is a variable interest entity. Pracker Company has no equity ownership in Seaton, but is its primary beneficiary. Pracker and Seaton were previously under common control. Which statement is true at the date Pracker becomes Seaton’s primary beneficiary? a. b. c. d.
Pracker does not consolidate Seaton. There is no consolidated noncontrolling interest. Consolidated noncontrolling interest equals the book value of Seaton’s net assets. Consolidated noncontrolling interest equals the fair value of Seaton’s net assets.
ANS:
c
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-13
Use the following information to answer questions 38 and 39: Pomery Company has a financial relationship with Styro Inc., a separate legal entity, but does not own any of Styro’s voting stock. Pomery determines that Styro is a variable interest entity and that Pomery is Styro’s prime beneficiary. Styro’s shareholders’ equity is as follows: Capital stock Retained earnings Total
$2,000 7,000 $9,000
Styro’s net assets are reported at values approximating fair value, except that its receivables are overvalued by $2,000 and its warranty obligations are undervalued by $5,000. The fair value of Styro is $15,000. Pomery and Styro were not under common control prior to Pomery’s determination that it must consolidate Styro. 38.
39.
Topic: Eliminating entries, VIE LO 1 On a consolidation working paper at the time Pomery decides it must consolidate Styro, eliminating entry (E) credits the noncontrolling interest in Styro by: a. b. c. d.
$ 9,000 $0 $ 5,000 $13,000
ANS:
a Styro’s equity accounts are recategorized as a noncontrolling interest.
Topic: Eliminating entries, VIE LO 1 On a consolidation working paper at the time Pomery decides it must consolidate Styro, eliminating entry (R) credits (debits) the noncontrolling interest in Styro by a. b. c. d.
$(7,000) $0 $6,000 $7,000
ANS:
c Goodwill = $15,000 – ($9,000 - $2,000 - $5,000) = $13,000 Revaluations = $13,000 - $2,000 - $5,000 = $6,000; or $15,000 - $9,000 = $6,000
©Cambridge Business Publishers, 2023 5-14
Advanced Accounting, 5th Edition
Use the following information to answer questions 40 - 44: Posit Company has a financial relationship with Sparkle Inc., a separate legal entity, but does not own any of Sparkle’s voting stock. On January 1, 2024, Posit determines that Sparkle is a variable interest entity and that Posit is Sparkle’s prime beneficiary. Sparkle’s shareholders’ equity on January 1, 2024 is as follows: Capital stock $3,000 Retained deficit (500) Total $2,500 Sparkle’s net assets are reported at values approximating fair value, but it has previously unreported identifiable intangible assets valued at $7,000. The fair value of Sparkle at January 1, 2024 is $16,000. 40.
41.
42.
Topic: Date-of-acquisition goodwill, VIE LO 1 Assume Posit and Sparkle were already under common control. On a January 1, 2024 consolidated balance sheet, goodwill is reported at: a. b. c. d.
$16,000 $10,000 $13,500 $0
ANS:
d No revaluations occur if the two companies were already under common control.
Topic: Date-of-acquisition noncontrolling interest, VIE LO 1 Assume Posit and Sparkle were already under common control. On a January 1, 2024 consolidated balance sheet, the noncontrolling interest in Sparkle is reported at: a. b. c. d.
$0 $ 2,500 $16,000 $ 8,000
ANS:
b There is no revaluation of Sparkle’s net assets, so the NCI = Sparkle’s book value.
Topic: Date-of-acquisition goodwill, VIE LO 1 Assume Posit and Sparkle were not already under common control. On a January 1, 2024 consolidated balance sheet, goodwill is reported at: a. b. c. d.
$16,000 $ 9,500 $ 7,000 $ 6,500
ANS:
d $16,000 – ($2,500 + $7,000) = $6,500
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-15
43.
44.
45.
46.
Topic: Date-of-acquisition eliminating entries, VIE LO 1 Assume Posit and Sparkle were not already under common control. On a January 1, 2024 consolidation working paper, eliminating entry (E) credits noncontrolling interest in Sparkle by: a. b. c. d.
$0 $ 2,500 $ 3,000 $16,000
ANS:
b
Topic: Date-of-acquisition eliminating entries, VIE LO 1 Assume Posit and Sparkle were not already under common control. On a January 1, 2024 consolidation working paper, eliminating entry (R) credits noncontrolling interest in Sparkle by: a. b. c. d.
$0 $ 7,000 $13,500 $16,000
ANS:
c $6,500 + $7,000 = $13,500
Topic: Consolidated financial statements, subsequent years LO 2 The consolidated financial statements of a parent and its 80%-owned subsidiary reports income to the noncontrolling interest a. b. c. d.
On the consolidated balance sheet, as a liability. On the consolidated balance sheet, as one of the equity accounts. On the consolidated income statement, as a deduction from consolidated income. On the consolidated income statement, as an expense.
ANS:
c
Topic: Consolidated income statement, noncontrolling interest LO 2 A parent owns less than 100% of the voting stock of its subsidiary. On its consolidated income statement, the earnings per share number is calculated using which of the following amounts in the numerator? a. b. c. d.
Consolidated net income Consolidated net income less consolidated dividends Consolidated net income plus noncontrolling interest in net income Consolidated net income less noncontrolling interest in net income
ANS:
d
©Cambridge Business Publishers, 2023 5-16
Advanced Accounting, 5th Edition
Use the following information to answer Questions 47 – 49. Provided are the consolidated trial balances of a parent and its less-than-wholly-owned subsidiary. Account Current assets Property, net Intangible assets, net Goodwill Liabilities Capital stock Retained earnings, beginning Accumulated other comprehensive income, beginning Noncontrolling interest Dividends Sales revenue Cost of sales and operating expenses Other comprehensive income Noncontrolling interest in net income Noncontrolling interest in other comprehensive income Total 47.
48.
Dr (Cr) $ 5,000 105,000 10,000 80,000 (162,405) (10,000) (15,000) (200) (2,500) 1,000 (400,000) 390,000 (1,000) 100 5 $ 0
Topic: Consolidated financial statements with noncontrolling interest, subsequent years LO 2 On the consolidated statement of income and comprehensive income, consolidated net income for the year is: a. b. c. d.
$11,000 $10,895 $11,105 $10,000
ANS:
d $400,000 - $390,000 = $10,000
Topic: Consolidated financial statements with noncontrolling interest, subsequent years LO 2 On the consolidated balance sheet, consolidated retained earnings at the end of the year is: a. b. c. d.
$23,900 $15,000 $24,000 $24,100
ANS:
a $15,000 + ($10,000 - $100) - $1,000 = $23,900
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-17
49.
50.
Topic: Consolidated financial statements with noncontrolling interest, subsequent years LO 2 On the consolidated balance sheet, consolidated accumulated other comprehensive income at the end of the year is: a. b. c. d.
$1,200 $1,195 $1,205 $1,305
ANS:
b $200 + $1,000 - $5 = $1,195
Topic: Consolidated financial statements with noncontrolling interest, subsequent years LO 2 Sometimes the consolidated trial balance for a parent and its subsidiary reports consolidated other comprehensive income, but a noncontrolling interest in other comprehensive loss. What is the reason for the discrepancy? a. b. c. d. ANS:
The noncontrolling interest is subtracted from consolidated income to obtain income to the controlling interest. The subsidiary declared dividends in excess of reported income for the year. The subsidiary reports an other comprehensive loss for the year, while the parent reports other comprehensive income for the year. The revaluation write-offs of identifiable intangible assets previously unreported by the subsidiary are in excess of the subsidiary’s reported comprehensive income. c
Use the following information to answer Questions 51 – 54. At the beginning of the year, Portal Corporation acquired 90% of Squaredeal Company’s voting stock for an acquisition cost of $62,000. The 10% noncontrolling interest in Squaredeal had a fair value of $5,000. The entire excess of fair value over book value was attributable to goodwill, which is not impaired during the year. It is now the end of the year, and Squaredeal’s trial balance is as follows: Squaredeal’s trial balance, end of year Current assets Plant assets, net Liabilities Capital stock Retained earnings, beginning Dividends Sales revenue Cost of sales and operating expenses Total
Dr (Cr) $ 3,000 97,000 (59,000) (12,700) (25,300) 1,000 (280,000) 276,000 $ 0
Portal uses the complete equity method to report its investment in Squaredeal on its own books. Questions 51 – 54 relate to consolidation of Portal and Squaredeal at the end of the year.
©Cambridge Business Publishers, 2023 5-18
Advanced Accounting, 5th Edition
51.
52.
53.
54.
Topic: Consolidation working paper, first year LO 2 On the consolidation working paper, eliminating entry (E) credits the noncontrolling interest in Squaredeal by: a. b. c. d.
$1,270 $2,530 $3,800 $3,840
ANS:
c ($12,700 + $25,300) x 10% = $3,800
Topic: Consolidation working paper, first year LO 2 On the consolidation working paper, eliminating entry (R) recognizes goodwill in the amount of: a. b. c. d.
$33,000 $29,000 $27,800 $41,700
ANS:
b $62,000 + $5,000 – ($12,700 + $25,300) = $29,000
Topic: Consolidation working paper, first year LO 2 On the consolidation working paper, eliminating entry (N) recognizes noncontrolling interest in net income of: a. b. c. d.
$400 $300 $0 $325
ANS:
a 10% x ($280,000 - $276,000) = $400
Topic: Consolidated financial statements, first year LO 2 On the consolidated balance sheet at the end of the year, the noncontrolling interest is valued at a. b. c. d.
$5,000 $3,800 $5,300 $5,400
ANS:
c $5,000 + 10% x ($4,000 - $1,000) = $5,300
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-19
Use the following information to answer Questions 55 – 60. On January 1, 2024, Peppermill Company acquired 60% of Salty Company’s voting stock for $6,610. The fair value of the 40% noncontrolling interest was $3,990. Salty’s net assets were reported at amounts approximating book value, but Peppermill determined that Salty had the following previously unreported intangible assets: • •
Developed technology, fair value $2,000, 5-year life Favorable leases, fair value $400, 4-year life
Salty’s shareholders’ equity on January 1, 2024 was $3,200. It is now December 31, 2025 (two years later). There are no impairments of identifiable intangibles in 2024 or 2025, but goodwill is impaired by $100 in 2025. Peppermill uses the complete equity method to report its investment in Salty on its own books. Salty’s December 31, 2025 trial balance appears below. Dr (Cr) $ 2,000 30,000 (27,100) (1,000) (3,000) (40,000) 35,000 4,100 $ 0
Current assets Property and equipment, net Liabilities Capital stock Retained earnings, January 1 Sales revenue Cost of goods sold Operating expenses Total 55.
56.
Topic: Goodwill at date of acquisition LO 1 What is the amount of goodwill recognized for this acquisition at the date of acquisition? a. b. c. d.
$4,500 $5,000 $6,000 $6,500
ANS:
b $6,610 + $3,990 - $3,200 - $2,000 - $400 = $5,000
Topic: Goodwill allocation at date of acquisition LO 1 What percentage of the total goodwill is allocated to the controlling interest? a. b. c. d.
60% 62% 65% 70%
©Cambridge Business Publishers, 2023 5-20
Advanced Accounting, 5th Edition
ANS:
57.
58.
59.
c $6,610 – (($3,200 + $2,000 + $400) x 60%) = $3,250 $3,250/$5,000 = 65%
Topic: Equity in net income calculation LO 2 What is the amount of equity in net income of Salty, reported in Peppermill’s December 31, 2025 trial balance? a. b. c. d.
$540 $240 $180 $175
ANS:
d (60% x ($900 - $400 - $100)) – (65% x $100) = $175
Topic: Consolidation eliminating entries, second year LO 2 When consolidating the trial balances of Peppermill and Salty at December 31, 2025, eliminating entry (E) credits Investment in Salty by a. b. c. d.
$2,400 $2,600 $3,200 $4,000
ANS:
a ($1,000 + $3,000) x 60% = $2,400
Topic: Consolidation eliminating entries, second year LO 2 When consolidating the trial balances of Peppermill and Salty at December 31, 2025, eliminating entry (R) credits the noncontrolling interest by a. b. c. d.
$ 800 $2,800 $2,760 $2,510
ANS:
d [(($2,000 - $400) + ($400 - $100)) x 40%] + ($5,000 x 35%) = $2,510
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-21
60.
Topic: Consolidation eliminating entries, second year LO 2 When consolidating the trial balances of Peppermill and Salty at December 31, 2025, eliminating entry (N) credits Investment in Salty by a. b. c. d.
$160 $125 $120 $360
ANS:
b (($900 - $400 - $100) x 40%) – ($100 x 35%) = $125
Use the following information to answer Questions 61 – 68. On January 1, 2023, Pali Company acquired 75% of Silicon Company’s voting stock for $44,300 in cash. The noncontrolling interest had an estimated fair value of $12,700. Silicon’s assets and liabilities at the date of acquisition were reported at amounts approximating fair value, but it had previously unreported indefinite life identifiable intangibles valued at $21,000. Silicon’s total shareholders’ equity at January 1, 2023 was as follows: Capital stock Retained earnings Accumulated other comprehensive income Total
$ 2,000 2,900 100 $ 5,000
It is now December 31, 2025 (three years later). Identifiable intangibles impairment through the end of 2024 was $1,000 and goodwill impairment through the end of 2024 was $400. There is no impairment of either identifiable intangibles or goodwill in 2025. Pali uses the complete equity method to account for its investment. December 31, 2025 trial balances for Pali and Silicon follow.
Current assets Property, net Intangibles Investment in Silicon Goodwill Liabilities Capital stock RE, beginning AOCI, beginning Sales revenue Equity in net income of Silicon Equity in OCI of Silicon Cost of goods sold Operating expenses Other comprehensive income Total ©Cambridge Business Publishers, 2023 5-22
Pali Dr (Cr) $ 5,000 42,000 – 45,732 – (53,887) (15,000) (19,680) (1,100) (25,000) (1,350) (15) 20,000 4,000 (700) $ 0
Silicon Dr (Cr) $ 1,000 28,000 – – – (20,664) (2,000) (4,400) (116) (14,000) – – 9,000 3,200 (20) $ 0
Advanced Accounting, 5th Edition
61.
62.
63.
64.
Topic: Goodwill calculation, noncontrolling interest LO 1 What is the initial goodwill related to this acquisition? a. b. c. d.
$52,000 $18,300 $31,000 $36,000
ANS:
c $44,300 + $12,700 – ($5,000 + $21,000) = $31,000
Topic: Goodwill calculation, noncontrolling interest LO 1 What percentage of initial goodwill is allocated to the controlling interest? a. b. c. d.
80% 85% 75% 70%
ANS:
a $44,300 – 75% x ($5,000 + $21,000) = $24,800; $24,800/$31,000 = 80%
Topic: Noncontrolling interest in income calculation, third year LO 2 On the consolidated income statement for 2025, what is the balance for noncontrolling interest in net income? a. b. c. d.
$320 $450 $364 $410
ANS:
b ($14,000 - $9,000 - $3,200) x 25% = $450
Topic: Consolidation working paper, noncontrolling interest, third year LO 2 On the consolidation working paper for 2025, what is the credit to noncontrolling interest in Silicon in eliminating entry (E)? a. b. c. d.
$ 500 $1,629 $1,600 $1,589
ANS:
b ($2,000 + $4,400 + $116) x 25% = $1,629
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-23
65.
66.
67.
68.
Topic: Consolidation working paper, noncontrolling interest, third year LO 2 On the consolidation working paper for 2025, what is the credit to noncontrolling interest in Silicon in eliminating entry (R)? a. b. c. d.
$12,750 $13,000 $11,200 $11,120
ANS:
d (25% x ($21,000 - $1,000)) + (20% x ($31,000 - $400)) = $11,120
Topic: Consolidated income statement, noncontrolling interest, third year LO 2 What is consolidated net income for 2025? a. b. c. d.
$2,080 $2,350 $2,800 $3,520
ANS:
c $39,000 - $29,000 - $7,200 = $2,800 See consolidation working paper below.
Topic: Consolidated balance sheet, third year LO 2 On the consolidated balance sheet at December 31, 2025, what is the balance for consolidated retained earnings? a. b. c. d.
$22,030 $21,760 $22,480 $23,200
ANS:
a Income to the controlling interest = $2,800 - $450 = $2,350 Consolidated retained earnings, December 31, 2025 = $19,680 + $2,350 = $22,030 See consolidation working paper below.
Topic: Consolidated statement of income and comprehensive income, noncontrolling interest, third year LO 2 What is consolidated comprehensive income for 2025? a. b. c. d.
$3,515 $3,520 $2,800 $3,255
©Cambridge Business Publishers, 2023 5-24
Advanced Accounting, 5th Edition
ANS:
b $2,800 + $720 = $3,520 See consolidation working paper below.
Consolidation working paper for Questions 61 – 68: Pali Dr (Cr) $ 5,000 42,000 – 45,732
Silicon Dr (Cr) $ 1,000 28,000 – –
Goodwill Liabilities Capital stock RE, beginning AOCI, beginning Noncontrolling interest
– (53,887) (15,000) (19,680) (1,100)
– (20,664) (2,000) (4,400) (116)
Sales revenue Equity in net income of Silicon Equity in OCI of Silicon Cost of goods sold Operating expenses Other comprehensive income Noncontrolling interest in NI Noncontrolling interest in OCI Total
(25,000) (1,350) (15) 20,000 4,000 (700) --$ 0
Current assets Property, net Intangibles Investment in Silicon
Dr
Cr
(R) 20,000 1,365 (C) 4,887 (E) 39,480 (R) (R) 30,600 (E) 2,000 (E) 4,400 (E) 116 1,629 (E) 11,120 (R) 455 (N)
(14,000) – 9,000 3,200 (20) --$ 0
(C) 1,350 (C) 15
(N) 450 (N) 5 $58,936
_____ $58,936
Consol Dr (Cr) $ 6,000 70,000 20,000 -30,600 (74,551) (15,000) (19,680) (1,100) (13,204) (39,000) --29,000 7,200 (720) 450 5 $ 0
Use the following information to answer Questions 69 - 72: Pomery Company has a financial relationship with Styro Inc., a separate legal entity, but does not own any of Styro’s voting stock. On January 1, 2023, Pomery determines that Styro is a variable interest entity and that Pomery is Styro’s prime beneficiary. Sparkle’s shareholders’ equity on January 1, 2023 is as follows: Capital stock Retained earnings Total
$2,000 7,000 $9,000
Styro’s net assets are reported at values approximating fair value, except that its equipment (5-year life, straight-line) is overvalued by $3,000 and it has previously unreported indefinite life identifiable intangibles valued at $4,000. The fair value of Styro at January 1, 2023 is $15,000. Pomery and Styro were not under common control prior to January 1, 2023. Styro reported net income of $800 in 2023, and identifiable intangibles were impaired by $200. Styro reported net income of $650 in 2024, and identifiable intangibles were not impaired. Goodwill was not impaired in either year.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-25
69.
70.
71.
72.
Topic: Consolidating a VIE, first year LO 2 Noncontrolling interest in net income, reported on the 2023 consolidated income statement, is a. b. c. d.
$1,200 $ 800 $1,400 $ 600
ANS:
a $800 + ($3,000/5) - $200 = $1,200
Topic: Consolidating a VIE, first year LO 2 Noncontrolling interest, reported on the December 31, 2023 consolidated balance sheet, is a. b. c. d.
$15,600 $10,200 $16,200 $15,800
ANS:
c $15,000 + $1,200 = $16,200
Topic: Consolidating a VIE, second year LO 2 Noncontrolling interest in net income, reported on the 2024 consolidated income statement, is a. b. c. d.
$1,450 $ 650 $ 50 $1,250
ANS:
d $650 + ($3,000/5) = $1,250
Topic: Consolidating a VIE, second year LO 2 Noncontrolling interest, reported on the December 31, 2024 consolidated balance sheet, is a. b. c. d.
$16,200 $16,850 $17,450 $18,650
ANS:
c $16,200 + $1,250 = $17,450
©Cambridge Business Publishers, 2023 5-26
Advanced Accounting, 5th Edition
73.
Topic: Noncontrolling interests and bargain purchases LO 3 When a subsidiary has a 20% noncontrolling interest, and the acquisition is a bargain purchase, the gain on acquisition is: a. b. c. d. ANS:
The fair value of identifiable net assets acquired less acquisition cost The fair value of identifiable net assets acquired less acquisition cost less fair value of noncontrolling interest 80% of the fair value of identifiable net assets less acquisition cost 80% of the fair value of identifiable net assets less acquisition cost less fair value of noncontrolling interest b
Use the following information to answer Questions 74 – 77. Python acquires 80% of the voting stock of Slither on January 1, 2024 at an acquisition cost of $6,000. The fair value of the noncontrolling interest is $1,000. Slither’s balance sheet at the date of acquisition is as follows:
Tangible assets Identifiable intangibles Liabilities Capital stock Retained earnings 74.
75.
Book Value Dr (Cr) $4,500 – (3,000) (300) (1,200)
Fair Value Dr (Cr) $7,500 3,000 (3,100) – –
Topic: Bargain purchase, noncontrolling interest, gain on acquisition LO 3 The gain on acquisition is: a. b. c. d.
$1,400 $ 80 $ 400 $ 320
ANS:
c $7,500 + $3,000 - $3,100 - $6,000 - $1,000 = $400
Topic: Consolidation working paper, bargain purchase, date of acquisition LO 3 On the consolidation working paper at January 1, 2024, what is the credit to noncontrolling interest in Slither in eliminating entry (E)? a. b. c. d.
$0 $ 380 $ 300 $1,000
ANS:
c
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-27
(E) Capital stock Retained earnings
300 1,200 Investment in Slither NCI in Slither
76.
1,200 300
Topic: Consolidation working paper, bargain purchase, date of acquisition LO 3 On the consolidation working paper at January 1, 2024, what is the credit to Investment in Slither in eliminating entry (R)? a. b. c. d.
$4,800 $5,120 $5,300 $5,200
ANS:
d Python records its investment at $6,400 (= $6,000 cost + $400 gain). $1,200 is credited in entry (E), so $5,200 is credited in entry (R). (R) Tangible assets ID intangible assets
3,000 3,000 Liabilities NCI in Slither Investment in Slither
77.
100 700 5,200
Topic: Consolidation working paper, bargain purchase, date of acquisition LO 3 On the consolidation working paper at January 1, 2024, what is the credit to Noncontrolling Interest in Slither in eliminating entry (R)? a. b. c. d.
$620 $700 $636 $650
ANS:
b See eliminating entry (R) in question 76 above; $1,000 - $300 = $700 Use the information below to answer Questions 78 – 81.
Pearl acquires 90% of the voting stock of Spruce on January 1, 2024 for $5,000. The fair value of the noncontrolling interest is $550. Spruce’s equity is reported at $4,800 at the date of acquisition. Its net assets are reported at amounts approximating fair value, but it has previously unreported identifiable intangible assets (5-year life, straight-line), valued at $1,000. Pearl uses the complete equity method to account for its investment. Spruce reports net income of $300 for 2024.
©Cambridge Business Publishers, 2023 5-28
Advanced Accounting, 5th Edition
78.
79.
80.
81.
Topic: Bargain purchase gain LO 3 At what value does Pearl record its investment in Spruce at January 1, 2024? a. b. c. d.
$5,100 $5,000 $5,250 $4,900
ANS:
c Gain on acquisition = $4,800 + $1,000 - $5,000 - $550 = $250 Investment = $5,000 + $250 = $5,250
Topic: Consolidated income statement, bargain purchase, first year LO 3 What is the noncontrolling interest in net income for 2024? a. b. c. d.
$30 $20 $10 $40
ANS:
c 10% x [$300 – ($1,000/5)] = $10
Topic: Consolidated balance sheet, bargain purchase, first year LO 3 What is the noncontrolling interest in Spruce at December 31, 2024? a. b. c. d.
$550 $560 $580 $540
ANS:
b $550 + $10 = $560
Topic: Consolidation working paper, bargain purchase, first year LO 3 On the 2024 consolidation working paper, what is the credit to noncontrolling interest in eliminating entry (R)? a. b. c. d.
$85 $65 $80 $70
ANS:
d Eliminating entry (R) must bring the NCI balance to its beginning-of-year balance of $550. Eliminating entry (E) credits the NCI by $480 (= 10% x $4,800). $550 - $480 = $70
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-29
82.
Topic: Noncontrolling interest valuation at the date of acquisition, IFRS alternative LO 4 How is the noncontrolling interest in a subsidiary valued at the date of acquisition, following the IFRS alternative method of valuing acquired goodwill? a. b. c. d. ANS:
83.
Fair value at the date of acquisition The noncontrolling interest’s share of the fair value of the subsidiary’s identifiable net assets at the date of acquisition The noncontrolling interest’s share of the book value of the subsidiary at the date of acquisition The noncontrolling interest’s share of the book value of the subsidiary at the date of acquisition plus its share of date-of-acquisition goodwill b
Topic: IFRS for goodwill valuation, noncontrolling interest LO 4 IFRS allows an alternative method for valuing the acquired subsidiary’s goodwill. When is U.S. GAAP and IFRS valuation of goodwill the same regardless of which valuation method is used under IFRS? a. b. c. d.
There is no noncontrolling interest in the acquired subsidiary. There are no revaluations of the acquired subsidiary’s identifiable net assets. There is no goodwill impairment. It is the date of acquisition.
ANS:
a
Use the following information to answer Questions 84 and 85. On January 1, 2024, Panda, a U.K. company, acquired 75% of Sauer’s voting stock for £20,000 in cash. The noncontrolling interest had an estimated fair value of £5,000. Sauers’s net assets were reported at amounts approximating fair value, but Panda identified the following identifiable intangible assets that are not reported on Sauer’s balance sheet:
Developed technology Brand names
Fair Value £2,000 6,000
Sauer’s total shareholders’ equity at January 1, 2024 was £4,200. Panda uses IFRS and values the noncontrolling interest using the IFRS alternative method. 84.
Topic: IFRS for noncontrolling interests, date of acquisition LO 4 At what value will the noncontrolling interest in Sauer be reported on the consolidated balance sheet at the date of acquisition? a. b. c. d.
£1,050 £3,050 £3,750 £5,000
©Cambridge Business Publishers, 2023 5-30
Advanced Accounting, 5th Edition
ANS: 85.
b (£4,200 + £2,000 + £6,000) x 25% = £3,050
Topic: IFRS for noncontrolling interests, date of acquisition LO 4 Total goodwill recognized for this acquisition is: a. b. c. d.
£ 9,600 £12,800 £ 5,800 £10,850
ANS:
d £20,000 – 75% x (£4,200 + £2,000 + £6,000) = £10,850
Use the following information to answer Questions 86 - 89 below. On January 1, 2024, PC Power Company, a company located in Singapore, acquired 75% of Sandisk Company’s voting stock for S$25,000 in cash. Indefinite life identifiable intangible assets not previously reported on Sandisk’s balance sheet had a fair value of S$8,000. There were no other date-of-acquisition revaluations of Sandisk’s identifiable net assets. Sandisk’s book value at January 1, 2024 was S$3,000. It is now December 31, 2025 (two years later). There is no goodwill impairment in 2024, and goodwill impairment for 2025 is S$300. The previously unreported identifiable intangible assets were impaired by S$200 in 2024 and S$100 in 2025. PC Power uses the complete equity method to account for its investment, and follows IFRS, using the alternative method for valuing noncontrolling interests and goodwill. December 31, 2025 trial balances for PC Power and Sandisk appear below.
Tangible assets, net Investment in Sandisk Liabilities Capital stock Retained earnings, beginning Sales revenue Equity in net income of Sandisk Cost of sales and operating expenses Total 86.
PC Power Dr (Cr) S$ 46,000 26,725 (35,350) (15,000) (21,000) (25,000) (375) 24,000 S$ 0
Sandisk Dr (Cr) S$ 30,500 – (24,500) (1,000) (4,000) (13,500) – 12,500 S$ 0
Topic: Consolidated balance sheet, subsequent year, IFRS LO 4 On the consolidated balance sheet at December 31, 2025, what is the balance for goodwill? a. b. c. d.
S$13,700 S$14,000 S$16,450 S$16,750
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-31
ANS:
87.
88.
89.
c Total goodwill = S$25,000 – 75% x (S$3,000 + S$8,000) = S$16,750 Goodwill is impaired by S$300 through 2025, so its December 31, 2025 balance is S$16,750 - S$300 = S$16,450.
Topic: Consolidated income statement, subsequent year, IFRS LO 4 On the consolidated income statement for 2025, what is the balance for noncontrolling interest in net income? a. b. c. d.
S$175 S$150 S$250 S$225
ANS:
d Under the IFRS alternative, goodwill impairment is not deducted from noncontrolling interest in net income. S$225 = 25% x (S$1,000 reported income – S$100 ID intangibles impairment).
Topic: Consolidation working paper, subsequent year, IFRS LO 4 On the consolidation working paper for 2025, what is the credit to the noncontrolling interest for eliminating entry (R)? a. b. c. d.
S$1,950 S$3,050 S$6,300 S$2,825
ANS:
a Entry (R) establishes revaluations as of the beginning of 2025. The NCI only shares in the revaluation of ID intangibles. Identifiable intangible assets: S$8,000 – S$200 = S$7,800 x 25% = S$1,950
Topic: Consolidation working paper, subsequent year, IFRS LO 4 On the consolidated balance sheet at December 31, 2025, what amount is reported for noncontrolling interest? a. b. c. d.
S$3,375 S$3,425 S$3,450 S$3,175
ANS:
b ((S$1,000 + S$4,000) x 25%) + S$1,950 + S$225 = $S$3,425
©Cambridge Business Publishers, 2023 5-32
Advanced Accounting, 5th Edition
90.
91.
92.
93.
Topic: Consolidated statement of cash flows LO 5 In the operating section of the consolidated statement of cash flows, if using the indirect method, which item below is subtracted from consolidated net income? a. b. c. d.
Consolidated depreciation expense Cash dividends received on equity method investments Noncontrolling interest in net loss of subsidiary Undistributed equity method income
ANS:
d
Topic: Consolidated statement of cash flows LO 5 On the consolidated statement of cash flows, cash dividends paid to the shareholders of the parent company are: a. b. c. d.
Reported in the operating activities section Reported in the investing activities section Reported in the financing activities section Not reported
ANS:
c
Topic: Consolidated statement of cash flows LO 5 On the consolidated statement of cash flows, where should cash dividends paid to noncontrolling shareholders appear? a. b. c. d.
Operating activities section Investing activities section Financing activities section Does not appear on the statement
ANS:
c
Topic: Consolidated statement of cash flows LO 5 On the consolidated statement of cash flows, prepared using the indirect method, depreciation expense is a. b. c. d.
added to consolidated net income in the operating section. a use of cash in the investing section. a source of cash in the financing section. not included.
ANS:
a
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-33
94.
Topic: Consolidated statement of cash flows LO 5 On a consolidated statement of cash flows, cash from financing activities may include all of the following except: a. b. c. d.
increase in long-term debt dividends paid to controlling shareholders dividends paid to noncontrolling shareholders increase in current liabilities
ANS:
d
Use the following information for Questions 95 – 98. Penrose Corporation acquired 80% of the voting stock of Speedy Company several years ago. There were no revaluations of Speedy’s identifiable net assets, and the excess of acquisition cost over Speedy’s book value was attributed entirely to goodwill. Here are the consolidated balance sheets for Penrose and Speedy, the consolidated income statement for 2025, plus additional information: Consolidated Balance Sheets at December 31 Assets Cash Other current assets Plant assets Accumulated depreciation Goodwill Total assets Liabilities & Equity Current liabilities Long-term debt Controlling interest in equity Noncontrolling interest in equity Total liabilities & equity
2025
2024
$ 220 600 4,550 (1,237) 470 $4,603
$ 210 580 4,300 (1,090) 500 $4,500
$ 590 3,015 925 73 $4,603
$ 600 3,000 850 50 $4,500
Consolidated Statement of Income and Comprehensive Income for 2025 Sales revenue $2,000 Less: Cost of goods sold (1,400) Less: Operating expenses and losses (450) Consolidated net income 150 Less: Noncontrolling interest in net income (25) Net income attributable to controlling interest $ 125 Additional information for 2025: 1. 2. 3. 4.
Consolidated depreciation expense was $400, and the goodwill impairment loss was $30. Plant assets with an original cost of $300 were sold for $20. Penrose declared and paid $50 in cash dividends. Speedy declared and paid $10 in cash dividends.
©Cambridge Business Publishers, 2023 5-34
Advanced Accounting, 5th Edition
95.
96.
97.
98.
Topic: Consolidated statement of cash flows LO 5 In the operating section of the 2025 consolidated statement of cash flows, the loss on the sale of plant assets is an adjustment to consolidated net income. The loss is a. b. c. d.
$ 32 $195 $ 27 $280
ANS:
c
Topic: Consolidated statement of cash flows LO 5 In the investing section of the 2025 consolidated statement of cash flows, investment in plant assets is a use of cash. The amount of this investment is a. b. c. d.
$245 $550 $265 $585
ANS:
b
Topic: Consolidated statement of cash flows LO 5 On the consolidated statement of cash flows for 2025, total cash dividends paid is: a. b. c. d.
$40 $50 $52 $10
ANS:
c
Topic: Consolidated statement of cash flows LO 5 On the consolidated statement of cash flows for 2025, net cash from operating activities is: a. b. c. d.
$577 $547 $550 $607
ANS:
a
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-35
Notes to questions 95 - 98: Cash from operating activities Consolidated net income Add (subtract) items not affecting cash: Depreciation expense Goodwill impairment loss Loss on sale of plant assets (1) Changes in current assets and liabilities: Increase in other current assets Decrease in current liabilities Net cash from operating activities Cash from investing activities Acquisition of plant assets (2) Sale of plant assets Cash from financing activities Increase in long-term debt Dividends paid to controlling shareholders Dividends paid to noncontrolling shareholders (3) Net increase in cash Plus cash balance, January 1 Cash balance, December 31
$ 150 $ 400 30 27 (20) (10)
(550) 20 15 (50) (2)
457
(30) 577
(530)
(37) 10 210 $ 220
(1) $1,090 + $400 – X = $1,237; X = $253 accumulated depreciation on plant assets sold; $300 – $253 = $47 book value; $20 - $47 = $27 loss on sale of plant assets. (2) X = cost of plant assets acquired; $4,300 + X – $300 = $4,550; X = $550 (3) $10 x 20% = $2
©Cambridge Business Publishers, 2023 5-36
Advanced Accounting, 5th Edition
PROBLEMS 1.
Topic: Goodwill allocation, date of acquisition LO 1 Below is information on a U.S. company’s acquisition: • • • • •
Acquisition cost $75,000 for 65% of the voting stock Fair value of noncontrolling interest $35,000 Book value of acquired company $40,000 No revaluations of reported identifiable net assets Previously unreported license agreements valued at $10,000
Required Calculate total goodwill and its allocation to the controlling and noncontrolling interest. ANS: Acquisition cost Fair value of noncontrolling interest Book value License agreements Fair value of identifiable net assets Goodwill Goodwill to controlling interest: Goodwill to noncontrolling interest: 2.
$40,000 10,000
$ 75,000 35,000 110,000 50,000 $ 60,000
$75,000 – (65% x $50,000) = $42,500 $60,000 – $42,500 = $17,500
Topic: Goodwill allocation, date of acquisition LO 1 Below is information on a U.S. company’s acquisition: • • • •
Acquisition cost $70 million for 80% of the voting stock Fair value of noncontrolling interest $15 million Book value of acquired company $3 million Required revaluations of identifiable net assets: o Previously unrecorded deferred tax liabilities, $1 million o Previously unrecorded identifiable intangible assets are valued at $8 million o Plant assets are overvalued by $5 million
Required Calculate total goodwill and its allocation to the controlling and noncontrolling interest. Report your answers in millions of dollars.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-37
ANS: (in millions) Acquisition cost Fair value of noncontrolling interest Book value Revaluations: Deferred tax liabilities Identifiable intangible assets Plant assets Fair value of identifiable net assets Goodwill Goodwill to controlling interest: Goodwill to noncontrolling interest: 3.
$ 70 15 85
$ 3 (1) 8 (5)
5 $ 80
$70 – (80% x $5) = $66 $80 – $66 = $14
Topic: Goodwill allocation, date of acquisition LO 19 Below is information on a U.S. company’s acquisition: • • • •
Acquisition cost $90,030 for 90% of the voting stock Fair value of noncontrolling interest $5,970 Book value of acquired company $20,000 Required revaluations of identifiable net assets: o Previously unrecorded warranty liabilities, $5,000 o Previously unrecorded developed technology, $30,000 o Inventories overvalued by $10,000 o Plant & equipment overvalued by $60,000
Required Calculate total goodwill and the percentage of goodwill allocated to the controlling interest. ANS: Acquisition cost Fair value of noncontrolling interest Book value Revaluations: Warranty liabilities Identifiable intangible asset Inventories Plant & equipment Fair value of identifiable net assets Goodwill
$20,000 (5,000) 30,000 (10,000) (60,000)
$90,030 5,970 96,000
(25,000) $121,000
Goodwill to controlling interest: $90,030 – (-$25,000 x 90%) = $112,530 $112,530/$121,000 = 93%
©Cambridge Business Publishers, 2023 5-38
Advanced Accounting, 5th Edition
4.
Topic: Acquisition cost, goodwill allocation, date of acquisition LO 1 A U.S. company acquires 65% of another company. The acquisition includes the following items: • • • • • • •
10,000 shares of new stock issued to the former shareholders of the acquired company, fair value $40/share $5/share in cash paid to the former shareholders of the acquired company, 25,000 shares acquired Registration fees for the stock, $2,000, paid in cash Legal and consulting fees, $3,000, paid in cash $5,000 in severance pay to former employees of the acquired company Vested stock options issued to employees of the acquired company, to replace options denominated in the acquired company’s stock, fair value $15,000 Unvested stock options issued to employees of the acquired company, to replace options denominated in the acquired company’s stock, terminated if the employee leaves the company, fair value $6,000
Fair value of the noncontrolling interest is $275,000. The acquired company’s book value at the date of acquisition is $25,000. The acquired company’s identifiable net assets are reported at amounts approximating fair value, except that it has previously unreported in-process research and development, valued at $75,000. Required a. Calculate acquisition cost. b. Calculate total goodwill and its allocation to the controlling and noncontrolling interest. ANS:
a.
b.
Fair value of stock issued Cash to former shareholders Severance pay Vested stock options Total acquisition cost
10,000 x $40 25,000 x $5
Acquisition cost Fair value of noncontrolling interest Book value Revaluation: Identifiable intangible assets Fair value of identifiable net assets Goodwill Goodwill to controlling interest: Goodwill to noncontrolling interest:
Test Bank, Chapter 5
$ 25,000 75,000
$ 400,000 125,000 5,000 15,000 $545,000 $ 545,000 275,000 820,000
100,000 $ 720,000
$545,000 – 65% x $100,000 = $480,000 $720,000 – $480,000 = $240,000
©Cambridge Business Publishers, 2023 5-39
5.
Topic: Consolidation eliminating entries, date of acquisition LO 1 Philker Corporation acquires 85% of the voting stock of Superfast Inc. at an acquisition cost of $300,000. The fair value of the noncontrolling interest is $45,000. Superfast’s equity at the date of acquisition is as follows: Capital stock Retained earnings Accumulated other comprehensive loss Total
$ 10,000 55,000 (5,000) $ 60,000
Superfast’s identifiable net assets are reported at values approximating fair value except that its inventories are overvalued by $2,000, its plant assets are overvalued by $15,000, and it has previously unreported identifiable intangible assets valued at $65,000. Required a. Calculate the date-of-acquisition goodwill, and its allocation to the controlling interest and noncontrolling interest. b. Prepare the eliminating entries (E) and (R) to consolidate Superfast at the date of acquisition. ANS: a.
Acquisition cost Fair value of noncontrolling interest Book value Revaluations: Inventories Plant assets Identifiable intangible assets Fair value of identifiable net assets Goodwill
$ 60,000 (2,000) (15,000) 65,000
$300,000 45,000 345,000
108,000 $237,000
$300,000 – (85% x $108,000) = $208,200 goodwill to controlling interest $237,000 - $208,200 = $28,800 goodwill to noncontrolling interest b.
(E) Capital stock Retained earnings
10,000 55,000 AOCL Investment in Superfast Noncontrolling interest in Superfast
©Cambridge Business Publishers, 2023 5-40
Advanced Accounting, 5th Edition
5,000 51,000 9,000
(R) Identifiable intangibles Goodwill
65,000 237,000 Inventories Plant assets, net Investment in Superfast (1) Noncontrolling interest in Superfast (2)
(1) (2)
6.
2,000 15,000 249,000 36,000
(85% x ($65,000 - $2,000 - $15,000)) + $208,200 = $249,000 (15% x ($65,000 - $2,000 - $15,000)) + $28,800 = $36,000
Topic: Date of acquisition consolidation eliminating entries LO 1 Page Company acquired 70 percent of Safari Corporation’s voting stock at an acquisition cost of $250,000. The estimated fair value of the noncontrolling interest was $90,000. At the date of acquisition, Safari’s book value was $50,000, consisting of capital stock of $3,000, additional paid-in capital of $49,000, accumulated other comprehensive income of $3,000, and treasury stock of $5,000. Safari reports its identifiable net assets at amounts approximating fair value, with these exceptions: property is overvalued by $20,000, deferred tax liabilities resulting from the acquisition are $3,000, previously unreported identifiable intangibles have a fair value of $45,000, and Safari has $15,000 of goodwill on its books from a previous acquisition. Required a. Calculate total goodwill for this acquisition and its allocation to the controlling and noncontrolling interests. b. Prepare working paper eliminating entries (E) and (R) needed to consolidate the accounts of Page and Safari at the date of acquisition. ANS: a.
Acquisition cost Fair value of noncontrolling interest Book value Revaluations: Property Deferred tax liabilities Identifiable intangible assets Goodwill (old) Fair value of identifiable net assets Goodwill
$ 50,000 (20,000) (3,000) 45,000 (15,000)
$250,000 90,000 340,000
57,000 $283,000
$250,000 – (70% x $57,000) = $210,100 goodwill to controlling interest $283,000 - $210,100 = $72,900 goodwill to noncontrolling interest
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-41
b.
(E) Capital stock Additional paid-in capital AOCI
3,000 49,000 3,000 Treasury stock Investment in Safari Noncontrolling interest in Safari
(R) Identifiable intangibles Goodwill (new)
5,000 35,000 15,000
45,000 283,000 Property Deferred tax liabilities Goodwill (old) Investment in Safari (1) Noncontrolling interest in Safari (2)
(1) (2)
7.
20,000 3,000 15,000 215,000 75,000
(70% x ($45,000 - $20,000 - $3,000 - $15,000)) + $210,100 = $215,000 (30% x ($45,000 - $20,000 - $3,000 - $15,000)) + $72,900 = $75,000
Topic: Consolidation working paper, noncontrolling interest, date of acquisition LO 1 The trial balances of Plough Company and Spin Corporation immediately following the acquisition of Spin by Plough on January 1, 2024, plus fair value information, is as follows:
Current assets Plant & equipment (net) Investment in Spin Current liabilities Long-term liabilities Capital stock Retained earnings Treasury stock Total
Plough Co. Book Value Dr (Cr) $ 4,000 60,000 40,000 (3,600) (81,000) (7,000) (12,700) 300 $ 0
Spin Corp. Book Value Dr (Cr) $ 2,000 25,000 -(1,800) (16,000) (8,600) (700) 100 $ 0
Spin Corp. Fair Value Dr (Cr) $ 1,500 20,000 -(2,000) (15,900)
In addition to the assets already reported by Spin Corporation, the following previously unreported identifiable intangible assets are appropriately recorded as assets per ASC Topic 805. Identifiable Intangible Asset Developed technology In-process R&D
Fair Value $3,000 5,000
Plough Company paid $40,000 in cash to acquire 80% of Spin Corporation’s voting stock. The fair value of the noncontrolling interest in Spin Corporation was $9,000.
©Cambridge Business Publishers, 2023 5-42
Advanced Accounting, 5th Edition
Required a. Calculate total goodwill to be recognized on this acquisition. b. Complete a working paper to consolidate the trial balances of Plough and Spin as of January 1, 2024. ANS: a.
b.
Acquisition cost Noncontrolling interest Total Book value Revaluations: Current assets Plant & equipment Current liabilities Long-term liabilities Developed technology In-process R&D Fair value of identifiable net assets Goodwill
$ 9,200 (500) (5,000) (200) 100 3,000 5,000
$40,000 9,000 49,000
11,600 $37,400
Consolidation working paper, January 1, 2024
Current assets
Plough Dr (Cr) $ 4,000
Spin Dr (Cr) $ 2,000
Cr 500 (R)
Consol Dr (Cr) $ 5,500
Plant & equipment (net)
60,000
25,000
5,000 (R)
80,000
Investment in Spin
40,000
--
7,360 (E) 32,640 (R)
--
Developed technology
--
--
(R) 3,000
3,000
IPR&D
--
--
(R) 5,000
5,000
Goodwill
--
--
(R) 37,400
37,400
Current liabilities
(3,600)
(1,800)
Long-term liabilities
(81,000)
(16,000) (R)
--
--
Noncontrolling interest Capital stock
(7,000)
Retained earnings
(12,700)
Treasury stock Total
Test Bank, Chapter 5
0
200 (R) 100
(5,600) (96,900)
1,840 (E) 7,160 (R)
(9,000)
(8,600) (E) 8,600 (700) (E)
300 $
Dr
$
(7,000)
700
100
______
0
$54,800
(12,700) 100 (E) $54,800
300 $
0
©Cambridge Business Publishers, 2023 5-43
8.
Topic: Acquisition cost, goodwill, consolidation working paper, date of acquisition LO 1 Penny Corporation purchased 60% of the shares of Silver Company for $150,000 in cash. Accounting and legal costs connected with the acquisition were $1,500, paid in cash. The acquisition also includes an earnout, currently valued at $6,000. At the date of acquisition, the fair value of Silver’s plant and equipment was $300,000 less than carrying value. However, Silver had $350,000 in identifiable intangible assets, unreported on its balance sheet but meeting the criteria for capitalization as part of the acquisition. The trial balances of Penny and Silver immediately following the acquisition appear below. Penny
Silver Dr (Cr) $ 149,000 $ 70,000 1,200,000 593,000 156,000 -(805,000) (500,000) (10,000) (1,000) (400,000) (180,000) (370,000) 20,000 30,000 (4,000) 50,000 2,000 $ 0 $ 0
Current assets Plant & equipment, net Investment in Silver Liabilities Common stock Additional paid-in capital Retained deficit (earnings) Accumulated other comprehensive loss (income) Treasury stock Total
The fair value of the noncontrolling interest was $85,000 at the date of acquisition. Required a. Calculate the goodwill reported for this acquisition. b. Prepare a working paper to consolidate the trial balances of Penny and Silver at the date of acquisition. ANS: a.
Acquisition cost Fair value of noncontrolling interest Total fair value Book value Revaluations: Plant & equipment Developed technology Fair value of identifiable net assets Goodwill
©Cambridge Business Publishers, 2023 5-44
$ 163,000 (300,000) 350,000
$ 156,000 85,000 241,000
(213,000) $ 28,000
Advanced Accounting, 5th Edition
b. Current assets Plant & equipment, net Identifiable intangibles Goodwill Investment in Silver Liabilities Common stock Additional paid-in capital Retained earnings AOCI Treasury stock Noncontrolling interest in Silver Total
9.
Penny Dr (Cr) $ 149,000 1,200,000 --156,000
Silver Dr (Cr) $ 70,000 593,000 ----
(805,000) (10,000) (400,000) (370,000) 30,000 50,000
(500,000) (1,000) (E) 1,000 (180,000) (E) 180,000 20,000 (4,000) (E) 4,000 2,000
$
-0
$
Dr
Cr 300,000 (R)
(R) 350,000 (R) 28,000
-0
97,800 (E) 58,200 (R)
20,000 (E)
2,000 (E) 65,200 (E) _______ 19,800 (R) $563,000 $563,000
Consol Dr (Cr) $ 219,000 1,493,000 350,000 28,000 -(1,305,000) (10,000) (400,000) (370,000) 30,000 50,000
$
(85,000) 0
Topic: Consolidation of VIE at date of acquisition, eliminating entries LO 1 Pearson Resorts uses a financial entity to obtain secured debt. On January 1, 2025, Pearson determines that the financial entity is a variable interest entity and Pearson is the primary beneficiary. Pearson has no equity interest in the VIE. The VIE’s trial balance on January 1, 2025 is as follows: Dr (Cr) $ 65,000 10,000 (74,000) (1,200) 200 $ 0
Receivables Other assets Liabilities Capital stock Retained deficit Total
The VIE’s receivables have a fair value of $62,000 and its other assets have a fair value of $8,000. The fair value of the VIE is $12,000. Required Prepare the eliminating entries to consolidate the VIE with Pearson on January 1, 2025, assuming the VIE and Pearson are: a. Already under common control. b. Not previously under common control. ANS: a.
(E) Capital stock
1,200 Retained deficit Noncontrolling interest
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-45
200 1,000
b.
(E) Capital stock
1,200 Retained deficit Noncontrolling interest
200 1,000
(R) Goodwill
16,000 Receivables Other assets Noncontrolling interest
10.
3,000 2,000 11,000
Topic: Consolidation of VIE at date of acquisition, working paper LO 1 Pebble Hotels uses a financial entity to obtain secured debt. On January 1, 2024, Pebble determines that the financial entity is a variable interest entity and Pebble is the primary beneficiary. Pebble has no equity interest in the VIE. The VIE’s trial balance on January 1, 2024 is displayed in the consolidation working paper below. The VIE’s financial assets have a fair value of $21,000 and its other assets have a fair value of $4,000. The fair value of the VIE is $5,000. Pebble and the VIE were not previously under common control. Required Fill in the working paper below to consolidate the VIE with Pebble at January 1, 2024.
Financial assets Other assets Goodwill Liabilities Capital stock Retained (earnings) deficit AOCI Noncontrolling interest Total
Pebble Dr (Cr) $ 150,000 900,000 -(720,000) (20,000) (300,000) (10,000) -$ 0
VIE Dr (Cr) $ 20,000 6,000 -(29,000) (2,000) 5,000 --$ 0
Pebble Dr (Cr) $ 150,000 900,000 -(720,000) (20,000) (300,000) (10,000) -$ 0
VIE Dr (Cr) $ 20,000 6,000 -(29,000) (2,000) 5,000 --$ 0
Dr
Cr
Dr (R) 1,000
Cr
Consol Dr (Cr)
ANS: Financial assets Other assets Goodwill Liabilities Capital stock Retained (earnings) deficit AOCI Noncontrolling interest Total
©Cambridge Business Publishers, 2023 5-46
2,000 (R) (R) 9,000 (E) 2,000 5,000 (E) (E) 3,000 $15,000
8,000 (R) $15,000
Consol Dr (Cr) $ 171,000 904,000 9,000 (749,000) (20,000) (300,000) (10,000) (5,000) $ 0
Advanced Accounting, 5th Edition
11.
Topic: Equity in net income and noncontrolling interest in net income LO 2 At the beginning of the current year, Pacific Travel Inc acquired 60 percent of Star Resorts’ voting stock for an acquisition cost of $50 million. Star reports its identifiable net assets at amounts approximating fair value, with these exceptions: land is undervalued by $3 million, property (20-year remaining life) is overvalued by $10 million, and previously unreported technology with an indefinite life was valued at $15 million. For the year following acquisition, Star reports net income of $150,000. Impairment testing reveals $100,000 in impairment on the technology but no impairment of other assets. Pacific Travel reports its investment in Star Resorts on its own books using the complete equity method. Required Calculate equity in net income for the current year, reported on Pacific Travel’s books, and the noncontrolling interest in Star Resorts’ income, reported on the consolidated income statement. ANS:
Star reported net income $150,000, split 60:40 Property revaluation write-off $10,000,000/20, split 60:40 Technology impairment $100,000, split 60:40 12.
Equity in Net Income of Star $ 90,000 300,000 (60,000) $330,000
Noncontrolling Interest in Net Income of Star $ 60,000 200,000 (40,000) $220,000
Consolidation eliminating entries, first year LO 2 Petro Corporation buys 80% of the voting stock of Supremo Inc. on January 1, 2024, at an acquisition cost of $12,000. The fair value of the noncontrolling interest at the date of acquisition is $2,000. Supremo’s equity at the date of acquisition consists of $1,000 in capital stock and a retained deficit of $500. The book values of Supremo’s reported net assets approximate fair value, except for property with a 10-year remaining life that is overvalued by $2,500. Supremo also has $3,000 in previously unreported indefinite-life identifiable intangible assets, capitalizable per ASC Topic 805. Supremo reports a net loss of $100 for 2024. The previously unreported identifiable intangibles and goodwill related to this acquisition are unimpaired in 2024. Petro uses the complete equity method to account for its investment in Supremo on its own books. Required a. Calculate the goodwill reported for this acquisition, and its allocation to Petro and to the noncontrolling interest in Supremo. b. Calculate equity in net loss for 2024, reported on Petro’s books, and the noncontrolling interest in Supremo’s net loss for 2024, reported on the consolidated income statement. c. Prepare eliminating entries (C), (E), (R), (O) and (N) necessary to consolidate the separate trial balances of Petro and Supremo at December 31, 2024. d. At what amount is the noncontrolling interest in Supremo reported on the December 31, 2024 consolidated balance sheet?
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-47
ANS:
a. Acquisition cost Fair value of noncontrolling interest Total fair value Book value Revaluations: Property Identifiable intangibles Fair value of identifiable net assets Goodwill
$ 500 (2,500) 3,000
$ 12,000 2,000 14,000
1,000 $ 13,000
Goodwill to controlling interest = $12,000 – (80% x $1,000) = $11,200 Goodwill to noncontrolling interest = $13,000 - $11,200 = $1,800 b.
Supremo reported net loss $100, split 80:20 Property revaluation write-off $2,500/10, split 80:20
c.
Equity in Net Income of Supremo $ (80) 200 $120
(C) Equity in net income of Supremo
Noncontrolling Interest in Net Income of Supremo $ (20) 50 $30
120 Investment in Supremo
(E) Capital stock
120
1,000 Retained deficit Investment in Supremo Noncontrolling interest in Supremo
(R) Identifiable intangibles Goodwill
500 400 100
3,000 13,000 Property Investment in Supremo (1) Noncontrolling interest in Supremo (2)
(1) (2)
2,500 11,600 1,900
(80% x $500) + $11,200 = $11,600 (20% x $500) + $1,800 = $1,900
(O) Property
250 Depreciation expense
(N) ©Cambridge Business Publishers, 2023 5-48
Advanced Accounting, 5th Edition
250
Noncontrolling interest in net income of Supremo
30 Noncontrolling interest in Supremo
d. 13.
30
$100 + $1,900 + $30 = $2,030
Topic: Goodwill, equity method, eliminating entries, first year LO 2 On July 1, 2024, the beginning of the 2025 fiscal year, Pluto Corporation acquired 80% of the voting stock of Saturn Company for $250,000 in cash and stock. The fair value of Saturn’s noncontrolling interest was $60,000. At the date of acquisition, Saturn’s equity accounts were as follows: Capital stock Retained earnings AOCI Total
$ 20,000 85,000 5,000 $110,000
Both companies have a June 30 year-end. At the date of acquisition, Saturn’s reported net assets had book values approximating fair value. However, it had previously unreported indefinite life identifiable intangibles valued at $80,000, meeting ASC Topic 805 requirements for capitalization. Impairment losses in fiscal 2025 for the identifiable intangibles were $2,000. Goodwill from the acquisition is not impaired in fiscal 2025. Saturn reported net income of $6,000 and an other comprehensive loss of $50 in fiscal 2025, and paid no dividends. Pluto uses the complete equity method to report its investment in Saturn on its own books. Required a. Calculate the date-of-acquisition goodwill for this acquisition and its allocation to the controlling and noncontrolling interests. b. Calculate equity in net income of Saturn, reported on Pluto’s books in fiscal 2025, and the noncontrolling interest in net income, reported on the consolidated income statement. c. Prepare eliminating entries (C), (E), (R), (O), and (N), required to consolidate Pluto’s trial balance accounts with those of Saturn on June 30, 2025. ANS: a.
Total goodwill = $250,000 + $60,000 - ($110,000 + $80,000) = $120,000 Goodwill to controlling interest: $250,000 - 80% x ($110,000 + $80,000) = $98,000 Goodwill to noncontrolling interest: $120,000 - $98,000 = $22,000
b.
Saturn reported net income $6,000 split 80:20 Identifiable intangibles write-off: $2,000 split 80:20
Test Bank, Chapter 5
Equity in Net Income of Saturn $4,800 (1,600) $3,200
Noncontrolling Interest in Net Income of Saturn $1,200 (400) $ 800
©Cambridge Business Publishers, 2023 5-49
c.
(C) Equity in net income of Saturn
3,200 Equity in OCL of Saturn Investment in Saturn
(E) Capital stock Retained earnings, beginning AOCI, beginning
40 3,160
20,000 85,000 5,000 Investment in Saturn Noncontrolling interest in Saturn
(R) Identifiable intangibles Goodwill
88,000 22,000
80,000 120,000 Investment in Saturn (1) Noncontrolling interest in Saturn (2)
(3) (4)
162,000 38,000
(80% x $80,000) + $98,000 = $162,000 (20% x $80,000) + $22,000 = $38,000
(O) Impairment loss
2,000 Identifiable intangibles
(N) Noncontrolling interest in net income of Saturn
2,000
800 Noncontrolling interest in OCL of Saturn Noncontrolling interest in Saturn
©Cambridge Business Publishers, 2023 5-50
Advanced Accounting, 5th Edition
10 790
14.
Topic: Goodwill allocation, equity method, eliminating entries, first year LO 2 Preston Company acquired 75% of Sparkle Corporation’s stock for $1,420 in cash on January 1, 2024, when Sparkle Corporation’s book value was $480, consisting of $50 in capital stock and $430 in retained earnings. The fair value of the noncontrolling interest was $380 at the date of acquisition. Preston uses the complete equity method to account for the investment on its own books. At the time of acquisition, all of Sparkle’s assets and liabilities were reported at fair value, except for unreported identifiable intangible assets with a fair value of $320. These intangibles are appropriately recorded as assets per ASC Topic 805, and have a remaining life of 2 years, straightline as of the date of acquisition. Goodwill arising from this acquisition is tested annually for impairment, and impairment for 2024 is $300. It is now December 31, 2024, and you are preparing the consolidated financial statements. Sparkle reported net income of $600 and declared and paid dividends of $100 for 2024. Required a. Calculate total goodwill at the date of acquisition and its allocation to the controlling and noncontrolling interest. b. Calculate equity in net income of Sparkle for 2024, as reported on Preston’s separate books, and noncontrolling interest in net income of Sparkle for 2024, as reported on the consolidated income statement. c. Prepare the eliminating entries, in journal form, to consolidate Preston and Sparkle’s trial balances at December 31, 2024. ANS: a.
Total goodwill = $1,420 + $380 - ($480 + $320) = $1,000 Goodwill to controlling interest: $1,420 – (75% x ($480 + $320)) = $820 (82%) Goodwill to noncontrolling interest: $1,000 - $820 = $180 (18%)
b.
Sparkle reported net income $600 split 75:25 Revaluation write-offs: Identifiable intangibles $320/2 split 75:25 Goodwill impairment loss $300 split 82:18 c.
Equity in Net Income of Sparkle $450
Noncontrolling Interest in Net Income of Sparkle $150
(120) (246) $ 84
(40) (54) $ 56
(C) Equity in net income of Sparkle
84 Dividends Investment in Sparkle
(E) Capital stock Retained earnings, beginning
75 9
50 430 Investment in Sparkle Noncontrolling interest in Sparkle
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-51
360 120
(R) Identifiable intangibles Goodwill
320 1,000 Investment in Sparkle Noncontrolling interest in Sparkle
(O) Goodwill impairment loss Amortization expense
1,060 260
300 160 Goodwill Identifiable intangibles
(N) Noncontrolling interest in net income of Sparkle
300 160
56 Dividends Noncontrolling interest in Sparkle
15.
Topic: Consolidation working paper, first year LO 2 Pine Resorts paid $48,775 in cash and stock to acquire 60% of the stock of Sharbot Hotels on January 1, 2025. Sharbot’s identifiable net assets were reported at amounts approximating fair value, except that it had $40,000 in previously unrecorded favorable leases (8-year life, straightline). The fair value of the noncontrolling interest on the acquisition date was estimated at $31,225. Goodwill impairment loss for 2025 is $4,000. The trial balances of Pine and Sharbot on December 31, 2025, one year after the acquisition, follow. Pine uses the complete equity method to report its investment in Sharbot on its own books.
Current assets Plant & equipment, net Investment in Sharbot Hotels Current liabilities Long-term debt Common stock Additional paid-in capital Retained earnings, Jan. 1 Sales revenue Equity in net income Cost of goods sold Operating expenses Total
©Cambridge Business Publishers, 2023 5-52
Pine Resorts Dr (Cr) $ 15,000 200,000 52,875 (8,000) (169,775) (1,000) (25,000) (40,000) (400,000) (4,100) 250,000 130,000 $ 0
Sharbot Hotels Dr (Cr) $ 4,000 80,000 -(3,000) (56,000) (200) (3,800) (5,000) (200,000) -120,000 64,000 $ 0
Advanced Accounting, 5th Edition
25 31
Required a. Calculate the total goodwill for this acquisition and its allocation to the controlling and noncontrolling interest. b. Prepare a schedule calculating 2025 equity in net income of Sharbot Hotels, appearing on Pine Resorts’ separate books, and the 2025 noncontrolling interest in consolidated net income, appearing on the 2025 consolidated income statement. c. Prepare a working paper to consolidate the December 31, 2025 trial balances of Pine Resorts and Sharbot Hotels. ANS: a. Acquisition cost $48,775 Fair value of noncontrolling interest 31,225 80,000 Book value $ 9,000 Identifiable intangible: Leases 40,000 49,000 Goodwill $ 31,000 Goodwill to controlling interest: $48,775 – (60% x $49,000) = $19,375 (62.5%) Goodwill to noncontrolling interest: $31,000 – $19,375 = $11,625 (37.5%) b. Sharbot Hotels reported net income $16,000 Leases amortization ($40,000/8) Goodwill impairment loss $4,000 (62.5:37.5)
Test Bank, Chapter 5
Equity in NI $ 9,600 (3,000) (2,500) $ 4,100
NCI in NI $ 6,400 (2,000) (1,500) $ 2,900
©Cambridge Business Publishers, 2023 5-53
c. Pine Resorts
Sharbot Hotels
Dr (Cr)
Dr (Cr)
Current assets
$ 15,000
$ 4,000
$ 19,000
Plant & equipment, net
200,000
80,000
280,000
Investment in Sharbot Hotels
52,875
--
Intangible assets
--
--
(R)
Goodwill
--
--
(R)
Current liabilities
(8,000)
(3,000)
(11,000)
Long-term debt
(169,775)
(56,000)
(225,775)
Common stock
(1,000)
(200)
(E)
200
(1,000)
Additional paid-in capital
(25,000)
(3,800)
(E)
3,800
(25,000)
Retained earnings, Jan. 1
(40,000)
(5,000)
(E)
5,000
(40,000)
Noncontrolling interest
--
--
(400,000)
(200,000)
Equity in net income
(4,100)
--
Cost of goods sold
250,000
120,000
Operating expenses
130,000
64,000
--
--
Sales revenue
Noncontrolling int. in NI Total
16.
$
0
$
0
Consol Dr
Cr
Dr (Cr)
4,100 (C) 5,400 (E) 43,375 (R)
--
40,000
5,000(O-1)
35,000
31,000
4,000(O-2)
27,000
3,600 (E) 27,625 (R) 2,900 (N)
(34,125)
(600,000) (C)
4,100
-370,000
(O-1) 5,000 (O-2) 4,000 (N)
203,000
2,900
______
$96,000
$96,000
2,900 $
Topic: Consolidation working paper and consolidated financial statements, first year LO 2 Pacer Hotels bought 80% of Southern Resorts’ voting stock on January 1, 2024 for $35,000. The fair value of the noncontrolling interest in Southern was $7,000 at the date of acquisition. Fair value information on Southern’s assets and liabilities at the date of acquisition is as follows: • • •
Property and equipment is overvalued by $5,000. P&E has a 10-year remaining life, straightline. Previously unreported identifiable intangibles are valued at $15,000. These intangibles have indefinite lives but testing reveals impairment of $1,000 in 2024. Goodwill reported for this acquisition is not impaired in 2024.
©Cambridge Business Publishers, 2023 5-54
Advanced Accounting, 5th Edition
0
The December 31, 2024 trial balances for Pacer and Southern are as follows:
Current assets Property & equipment, net Investment in Southern Liabilities Capital stock Retained earnings, Jan. 1 Treasury stock Dividends Sales revenue Equity in NI of Southern Cost of goods sold Operating expenses Total
Pacer Dr (Cr) $ 21,900 90,000 38,200 (74,500) (40,000) (30,000) 2,000 – (84,000) (3,600) 55,000 25,000 $ 0
Southern Dr (Cr) $ 10,000 60,000 – (57,500) (5,000) (3,100) 100 500 (50,000) – 30,000 15,000 $ 0
Pacer uses the complete equity method to account for its investment in Southern on its own books. Required a. Prepare a schedule calculating the initial value of goodwill for this acquisition, and its allocation to the parent and to the noncontrolling interest. b. Calculate Pacer’s equity in net income of Southern for 2024, reported on Pacer’s books, and the noncontrolling interest in consolidated net income for 2024, shown on the 2024 consolidated income statement. c. Prepare a working paper to consolidate the December 31, 2024 trial balances of Pacer and Southern. d. Prepare the 2024 consolidated income statement and December 31, 2024 consolidated balance sheet. ANS: a.
Acquisition cost Fair value of NCI Total fair value Book value Fair value – Book value: P&E (10 year life) ID intangibles ($1,000 impairment in first year) Fair value of identifiable net assets Goodwill Goodwill to parent $35,000 – (80% x $18,000) Goodwill to NCI ($24,000 – $20,600)
Test Bank, Chapter 5
$ 8,000 (5,000) 15,000
$35,000 7,000 42,000
18,000 $24,000 20,600 3,400
©Cambridge Business Publishers, 2023 5-55
b. Southern’s reported net income Revaluation write-offs: Plant & equipment Identifiable intangibles
Total $ 5,000
Equity in NI $ 4,000
NCI in NI $ 1,000
500 (1,000) $ 4,500
400 (800) $ 3,600
100 (200) $ 900
c. Current assets Property & equipment, net Identifiable intangibles Investment in Southern
Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Treasury stock Noncontrolling interest in Southern Dividends
Pacer Dr (Cr) $ 21,900 90,000 – 38,200
– (74,500) (40,000) (30,000) 2,000
–
Southern Dr (Cr) Dr $ 10,000 60,000 (O) 500 – (R) 15,000 –
– (R) (57,500) (5,000) (E) (3,100) (E) 100
5,000 (R) 1,000 (O) 3,200 (C) 6,400 (E) 28,600 (R)
24,000 5,000 3,100 100 (E) 1,600 (E) 5,400 (R) 800 (N) 400 (C) 100 (N)
500
Sales revenue Equity in NI of Southern Cost of goods sold Operating expenses
(84,000) (3,600) 55,000 25,000
(50,000) – (C) 30,000 15,000 (O)
Noncontrolling interest in net income of Southern Total
_______ $ 0
_______ (N) 900 $ 0 $53,100
©Cambridge Business Publishers, 2023 5-56
Cr
3,600 1,000
500 (O)
$53,100
Consol Dr (Cr) $ 31,900 145,500 14,000 -
24,000 (132,000) (40,000) (30,000) 2,000 (7,800) (134,000) 85,000 40,500
$
Advanced Accounting, 5th Edition
900 0
d.
Consolidated Income Statement for 2024 Sales revenue $134,000 Cost of goods sold 85,000 Gross margin 49,000 Operating expenses 40,500 Consolidated net income 8,500 Consolidated income to the noncontrolling interest (900) Consolidated income to the controlling interest $ 7,600 Consolidated Balance Sheet at December 31, 2024
17.
Assets Current assets Property & equipment, net Identifiable intangibles Goodwill
$ 31,900 145,500 14,000 24,000
Total assets
________ $215,400
Liabilities and equity Liabilities Equity Capital stock Retained earnings Treasury stock Equity to the parent Equity to noncontrolling interest Total equity Total liabilities and equity
$132,000
$ 40,000 37,600 (2,000) 75,600 7,800 83,400 $215,400
Topic: Consolidated financial statements, subsequent years, noncontrolling interests LO 2 The December 31, 2025 consolidated trial balance of a parent and its subsidiary is shown below. Current assets Property, net Intangible assets, net Goodwill Liabilities Capital stock Retained earnings, beginning Accumulated other comprehensive income, beginning Treasury stock Noncontrolling interest Dividends Sales revenue Cost of sales Operating expenses Other comprehensive income Noncontrolling interest in net income Noncontrolling interest in other comprehensive income Total
Dr (Cr) $ 6,000 150,000 25,000 95,000 (229,030) (15,000) (20,000) (700) 800 (3,000) 1,000 (500,000) 390,000 100,000 (200) 120 10 $ 0
Required Present the 2025 consolidated statement of income and comprehensive income, and the December 31, 2025 consolidated balance sheet, in good form.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-57
ANS: Consolidated Statement of Income for 2025 Sales revenue Cost of sales Operating expenses Consolidated net income Noncontrolling interest in net income Consolidated net income to the parent
$ 500,000 (390,000) (100,000) 10,000 (120) $ 9,880
Consolidated Statement of Comprehensive Income for 2025 Consolidated net income $ 10,000 Other comprehensive income 200 Consolidated comprehensive income 10,200 Comprehensive income to the noncontrolling interest * (130) Consolidated comprehensive income to the parent $ 10,070 * $130 = $120 + $10
Assets Current assets Property, net Intangibles Goodwill
Total assets
Consolidated Balance Sheet, December 31, 2025 Liabilities $ 6,000 Total liabilities 150,000 25,000 Equity 95,000 Capital stock Retained earnings * Accumulated OCI ** Treasury stock Equity to the parent Noncontrolling interest ______ Total equity $276,000 Total liabilities and equity
$229,030
$ 15,000 28,880 890 (800) 43,970 3,000 46,970 $276,000
*$28,880 = $20,000 + $9,880 – $1,000 **$890 = $700 + $200 – $10
©Cambridge Business Publishers, 2023 5-58
Advanced Accounting, 5th Edition
18.
Topic: Goodwill, complete equity method, eliminating entries, second year LO 2 The trial balance of Salmon Company at January 1, 2023 is as follows, along with estimated fair values of its assets and liabilities:
Current assets Plant & equipment, net Client contracts Liabilities Capital stock Retained earnings Total
Book Value Dr (Cr) $ 200 29,800 0 (15,000) (14,000) (1,000) $ 0
Fair Value Dr (Cr) $ 100 30,800 16,000 (14,900) ---
Information on the revalued assets and liabilities is as follows: Revaluation Current assets (inventory) Plant & equipment Client contracts Liabilities Goodwill
Remaining Life as of January 1, 2023 FIFO, sold in 2023 10 years, straight-line 5 years, straight-line 2 years, straight-line No impairment
Perch Corporation paid $80,000 in cash to acquire 90% of the voting stock of Salmon Company on January 1, 2023. The noncontrolling interest was valued at $7,000 at the date of acquisition. It is now December 31, 2024, two years after the acquisition. Salmon reported net income of $4,000 in 2024 and declared no dividends. Salmon’s January 1, 2024 retained earnings balance is $1,600. Perch uses the complete equity method to account for the investment in Salmon on its own books. Required a. Calculate the total goodwill at January 1, 2023, and its allocation to the controlling and noncontrolling interest. b. Calculate equity in net income of Salmon and the noncontrolling interest in net income of Salmon for 2024. c. Calculate the December 31, 2024 Investment in Salmon balance, reported on Perch’s books. d. Prepare the eliminating entries, in journal form, to consolidate Perch and Salmon at December 31, 2024.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-59
ANS: a.
Acquisition cost Noncontrolling interest Total fair value Book value Revaluations: Current assets Plant & equipment Client contracts Liabilities Goodwill
$80,000 7,000 87,000
$15,000 (100) 1,000 16,000 100
32,000 $55,000
Goodwill to controlling interest = $80,000 - (90% x $32,000) = $51,200 Goodwill to noncontrolling interest = $55,000 - $51,200 = $3,800 b. Equity in Net Income of Salmon
Noncontrolling Interest in Net Income of Salmon
$3,600
$400
(90) (2,880) (45) $ 585
(10) (320) (5) $ 65
Salmon’s reported net income; $4,000 split 90:10 Revaluation write-offs: Plant & equipment; $1,000/10 split 90:10 Client contracts; $16,000/5 split 90:10 Liabilities; $100/2, split 90:10 c. Investment, January 1, 2023 Change in retained earnings, 2023 Revaluation write-offs, 2023: Current assets Plant & equipment Client contracts Liabilities Investment, January 1, 2024 Equity in net income, 2024 Investment, December 31, 2024 d.
$80,000 540
90% x ($1,600 - $1,000) 90% x $100 90% x ($1,000/10) 90% x ($16,000/5) 90% x ($100/2)
(C) Equity in net income of Salmon
90 (90) (2,880) (45) 77,615 585 $78,200
585 Investment in Salmon
(E) Capital stock Retained earnings, beginning
14,000 1,600 Investment in Salmon Noncontrolling interest in Salmon
©Cambridge Business Publishers, 2023 5-60
585
14,040
Advanced Accounting, 5th Edition
1,560
(R) Plant & equipment, net Client contracts Liabilities Goodwill
900 12,800 50 55,000 Investment in Salmon (1) Noncontrolling interest in Salmon (2)
63,575 5,175
(1) [90% x ($900 + $12,800 + $50)] + $51,200 = $63,575 (2) [10% x ($900 + $12,800 + $50)] + $3,800 = $5,175
(O) Depreciation expense Amortization expense Interest expense
100 3,200 50 Plant & equipment, net Client contracts Liabilities
(N) Noncontrolling interest in net income of Salmon
100 3,200 50
65 Noncontrolling interest in Salmon
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-61
65
19.
Topic: Consolidation working paper, second year LO 2 Python acquired 75% of Slither’s stock for $316,000 in cash on January 2, 2023. The fair value of the noncontrolling interest in Slither was $89,000. Slither’s book value at that time was $120,000. The assets and liabilities reported on Slither’s balance sheet had balances that approximated fair value at the date of acquisition. However, Slither had previously unreported developed technology (10-year life, straight-line), valued at $40,000. There has been no impairment loss on the developed technology since acquisition. Goodwill was impaired by $6,000 in 2023, and by $3,000 in 2024. It is now December 31, 2024. The trial balances of Python and Slither appear below.
Current assets Plant assets, net Investment in Slither Liabilities Capital stock Retained earnings, Jan. 1 AOCI, Jan. 1 Treasury stock Sales revenue Equity in net income of Slither Equity in OCI of Slither Cost of goods sold Amortization and depreciation expense Other operating expenses Other comprehensive income Total
Python Dr (Cr) $ 113,500 1,200,000 323,800 (1,342,950) (40,000) (215,000) (15,000) – (400,000) (2,100) (2,250) 250,000 40,000 95,000 (5,000) $ 0
Slither Dr (Cr) $ 35,000 500,000 – (387,000) (20,000) (110,000) (10,000) 5,000 (100,000) – – 35,000 15,000 40,000 (3,000) $ 0
Required a. Calculate the initial goodwill for this acquisition, and its allocation to the controlling and noncontrolling interest. b. Prepare a schedule calculating equity in net income for 2024, reported on Python’s books, and noncontrolling interest in net income for 2024, reported on the consolidated income statement. c. Prepare a working paper consolidating the December 31, 2024 trial balances of Python and Slither.
©Cambridge Business Publishers, 2023 5-62
Advanced Accounting, 5th Edition
ANS: a.
Acquisition cost Fair value of NCI Total value Book value Developed technology Goodwill
$ 316,000 89,000 405,000
$ 120,000 40,000
160,000 $ 245,000
Goodwill to controlling interest: $316,000 – (75% x 160,000) = Goodwill to noncontrolling interest
$ 196,000 49,000
(80%) (20%)
b. Equity in NI $ 7,500 (3,000) (2,400) $ 2,100
Slither’s reported net income Amortization of developed technology Goodwill impairment loss
NCI in NI $ 2,500 (1,000) (600) $ 900
c. Current assets Plant assets, net Investment in Slither Identifiable intangibles Goodwill Liabilities Capital stock Retained earnings, Jan. 1 AOCI, Jan. 1 Treasury stock Noncontrolling interest Sales revenue Equity in net income of Slither Equity in OCI of Slither Cost of goods sold Amortization and depreciation expense Other operating expenses Noncontrolling interest in NI Noncontrolling interest in OCI OCI Total
Test Bank, Chapter 5
Python Dr (Cr) $ 113,500 1,200,000 323,800
Slither Dr (Cr) $ 35,000 500,000 –
– – (1,342,950) (40,000) (215,000) (15,000) –
– – (387,000) (20,000) (110,000) (10,000) 5,000
(400,000) (2,100) (2,250) 250,000 40,000
(100,000) – – 35,000 15,000
95,000
40,000
$
(5,000) 0
$
(3,000) 0
Dr
Cr
(R) 36,000 (R) 239,000
4,350 (C) 101,250 (E) 218,200 (R) 4,000 (O) 3,000 (O)
(E) 20,000 (E) 110,000 (E) 10,000 5,000 (E) 33,750 (E) 56,800 (R) 1,650 (N) (C) (C)
2,100 2,250
(O)
4,000
(O) (N) (N)
3,000 900 750
$428,000
Consol. Dr (Cr) $ 148,500 1,700,000 – 32,000 236,000 (1,729,950) (40,000) (215,000) (15,000) – (92,200) (500,000) – – 285,000 59,000
$428,000
©Cambridge Business Publishers, 2023 5-63
138,000 900 750 (8,000) $ 0
20.
Topic: Consolidation working paper, third year LO 2 Phantom Casinos bought 65% of Simpson Entertainment’s voting stock on January 1, 2023 for $33,900. The fair value of the noncontrolling interest in Simpson was $16,100, and Simpson’s book value was $6,000 on that date. Simpson’s net assets were valued at amounts approximating fair value, except previously unreported identifiable intangible assets, meeting the criteria for capitalization, were valued at $16,000. These intangibles have an 8-year life, straight-line. Goodwill from this acquisition is impaired by $5,000 to the beginning of 2025 and is impaired by $400 in 2025. Phantom uses the complete equity method to record its investment in Simpson on its own books. The separate trial balances of Phantom and Simpson at December 31, 2025 are as follows:
Current assets Property & equipment, net Investment in Simpson Liabilities Capital stock Retained earnings, Jan. 1 Accumulated other comprehensive loss (income), Jan. 1 Treasury stock Sales revenue Equity in NI of Simpson Equity in OCI of Simpson Cost of goods sold Operating expenses Other comprehensive loss (income) Total
Phantom Dr(Cr) $ 15,000 200,000 31,810 (189,700) (15,000) (40,000)
Simpson Dr (Cr) $ 5,000 80,000 – (70,400) (300) (12,100)
(400) 250 (200,000) (45) (65) 120,000 78,000 150 $ 0
300 100 (50,000) – – 35,000 12,500 (100) $ 0
Required a. Prepare a schedule calculating the initial value of goodwill for this acquisition, and its allocation to Phantom and to the noncontrolling interest in Simpson. b. Prepare a schedule calculating Phantom’s equity in net income of Simpson for 2025, and the noncontrolling interest in Simpson’s net income. c. Prepare a schedule calculating the December 31, 2025 balance for Investment in Simpson, reported on Phantom’s books. d. Prepare a working paper to consolidate the trial balances of Phantom and Simpson at December 31, 2025.
©Cambridge Business Publishers, 2023 5-64
Advanced Accounting, 5th Edition
ANS: a.
Acquisition cost Fair value of noncontrolling interest Total fair value of Simpson Book value of Simpson Revaluation of identifiable intangible assets Total fair value of Simpson’s identifiable net assets Goodwill
$ 6,000 16,000
$33,900 16,100 50,000 22,000 $28,000
Goodwill to Phantom: $33,900 – (65% x $22,000) = $19,600 (70%) Goodwill to noncontrolling interest: $28,000 – $19,600 = $8,400 (30%) b.
Simpson’s reported net income $2,500 ID revaluation write-off ($16,000/8 = $2,000) Goodwill impairment loss $400, split 70:30 Total c.
Equity in Net Income $1,625 (1,300) (280) $ 45
Acquisition cost 65% x change in book value of Simpson to beginning of year: ($12,000 – $6,000) x 65% Revaluation write-offs to beginning of year (2 years): ID intangibles: $2,000 x 2 x 65% Goodwill: $5,000 x 70% Investment, beginning of year Equity in net income for 2025 Equity in OCI for 2025 Investment, December 31, 2025
Test Bank, Chapter 5
Noncontrolling Interest in Net Income $ 875 (700) (120) $ 55 $ 33,900 3,900 (2,600) (3,500) 31,700 45 65 $ 31,810
©Cambridge Business Publishers, 2023 5-65
d. Phantom Dr (Cr) $ 15,000 200,000 – 31,810
Simpson Dr (Cr) $ 5,000 80,000 – –
Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Accum. other comprehensive loss (income), Jan. 1 Treasury stock Noncontrolling interest in Simpson
– (189,700) (15,000) (40,000) (400)
– (70,400) (300) (12,100) 300
250 –
100 –
Sales revenue Equity in NI of Simpson Equity in OCI of Simpson Cost of goods sold Operating expenses Noncontrolling interest in NI Other comprehensive loss (income) Noncontrolling interest in OCI Total
(200,000) (45) (65) 120,000 78,000
(50,000) – – 35,000 12,500
150
(100)
Current assets Property & equipment, net Identifiable intangibles Investment in Simpson
©Cambridge Business Publishers, 2023 5-66
$
– 0
$
– 0
Dr
Cr
(R) 12,000
2,000 (O) 110 (C) 7,800 (E) 23,900 (R) 400 (O)
(R) 23,000 (E) 300 (E) 12,100
300 (E) 100 (E) 4,200 (E) 11,100 (R) 90 (N) (C) (C)
22,600 (260,100) (15,000) (40,000) (400) 250 (15,390) (250,000) --155,000 92,900 55 50
45 65
(O) 2,400 (N) 55
(N) 35 $50,000
Consol. Dr (Cr) $ 20,000 280,000 10,000 --
______ $50,000
$
Advanced Accounting, 5th Edition
35 0
21.
Topic: Consolidation working paper, financial statements, third year LO 2 Panerai acquired 60% of Stefanel’s voting stock for an acquisition cost of $35,550 on January 1, 2023, when Stefanel’s book value was $8,000. The fair value of the noncontrolling interest at the date of acquisition was $16,450. All of Stefanel’s assets and liabilities were reported at amounts approximating fair value, except buildings and equipment with a 20-year remaining life, straightline were overvalued by $10,000, and Stefanel has previously unreported identifiable intangible assets with a 10-year life, straight-line, valued at $25,000. There is no impairment of buildings and equipment or identifiable intangibles through the end of 2025. Total impairment of goodwill arising from this acquisition to the beginning of 2025 was $2,000. Goodwill impairment for 2025 is $1,000. You are preparing the consolidated financial statements for 2025. The trial balances of Panerai and Stefanel at December 31, 2025 appear in the consolidation working paper below. Panerai uses the complete equity method to report its investment on its own books. Panerai Dr (Cr) $ 26,000 140,000 -39,840
Stefanel Dr (Cr) $ 7,000 90,000 ---
Goodwill Total liabilities Capital stock Retained earnings, beginning Accumulated other comprehensive loss (income), beginning Noncontrolling interest
-(158,465) (5,000) (25,260) (850)
-(72,100) (2,000) (18,500) 500
--
--
Sales revenue Other comprehensive loss (income) Equity in income of Stefanel Equity in OCL of Stefanel Cost of goods sold Operating expenses
(150,000) (275) (1,050) 60 120,000 15,000
(50,000) 100 --30,000 15,000
--0
--0
Current assets Plant & equipment, net Identifiable intangible assets Investment in Stefanel
Noncontrolling interest in income Noncontrolling interest in OCL Total
Test Bank, Chapter 5
$
$
Dr
Cr
Consol. Dr (Cr)
©Cambridge Business Publishers, 2023 5-67
Required a. Calculate the total goodwill originally recognized for this acquisition, and its allocation to the controlling interest and the noncontrolling interest. b. Calculate 2025 equity in net income of Stefanel, reported on Panerai’s books, and noncontrolling interest in consolidated net income, reported on the 2025 consolidated income statement. c. Complete the working paper below to consolidate the December 31, 2025 trial balances of Panerai and Stefanel. d. Present, in good form, the consolidated statement of income and comprehensive income for 2025. ANS: a.
Acquisition cost Fair value of noncontrolling interest Total fair value Book value Revaluations: Buildings & equipment Identifiable intangibles Fair value of identifiable net assets Goodwill
$ 8,000 (10,000) 25,000
$ 35,550 16,450 52,000
23,000 $ 29,000
Goodwill to CI = $35,550 – (60% x $23,000) = $21,750 (75%) Goodwill to NCI = $29,000 - $21,750 = $7,250 (25%) b.
Stefanel’s reported net income for 2025 (total $5,000) Revaluation write-offs for 2025: Buildings & equipment $10,000/20 Identifiable intangibles $25,000/10 Goodwill $1,000 split 75:25
©Cambridge Business Publishers, 2023 5-68
Equity in NI $ 3,000
Noncontrolling Interest in NI $ 2,000
300 (1,500) (750) $ 1,050
200 (1,000) (250) $ 950
Advanced Accounting, 5th Edition
c.
Current assets Buildings & equipment, net Identifiable intangible assets Investment in Stefanel
Panerai Dr (Cr) $ 26,000 140,000 -39,840
Stefanel Dr (Cr) $ 7,000 90,000 ---
Goodwill Total liabilities Capital stock Retained earnings, beginning
-(158,465) (5,000) (25,260)
-- (R) 27,000 (72,100) (2,000) (E) 2,000 (18,500) (E) 18,500
Dr
Cr
(O) 500 (R) 20,000
9,000 (R) 2,500 (O) 990 (C) 12,000 (E) 26,850 (R) 1,000 (O)
Consol. Dr (Cr) $ 33,000 221,500 17,500 -26,000 (230,565) (5,000) (25,260)
Accumulated other comprehensive loss (income), beginning Noncontrolling interest
(850)
500
500 (E)
(850)
--
--
8,000 (E) 11,150 (R) 910 (N)
(20,060)
Sales revenue Other comprehensive loss (income) Equity in net income of Stefanel Equity in OCL of Stefanel Cost of goods sold Operating expenses
(150,000) (275) (1,050) 60 120,000 15,000
Noncontrolling interest in NI Noncontrolling interest in OCL Total
$
--0
(50,000) 100 -- (C) 1,050 -30,000 15,000 (O) 2,500 (O) 1,000 -- (N) 950 -______ $ 0 $73,500
500 (O)
(200,000) (175) --150,000 33,000
40 (N) $73,500
950 (40) 0
60 (C)
$
d. Consolidated Statement of Income and Comprehensive Income for 2025 Sales revenue $ 200,000 Cost of goods sold (150,000) Gross margin 50,000 Operating expenses (33,000) Consolidated net income 17,000 Consolidated net income to the noncontrolling interest (950) Consolidated net income to the controlling interest $ 16,050 Consolidated net income Other comprehensive income Consolidated comprehensive income Consolidated comprehensive income to the noncontrolling interest (1) Consolidated comprehensive income to the controlling interest
$ 17,000 175 17,175 (910) $ 16,265
(1) $910 = $950 – $40
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-69
22.
Topic: Consolidation eliminating entries, fourth year LO 2 Pillar Company acquired 60% of Sally Corporation’s stock for $2,970 in cash on January 1, 2022, when Sally’s book value was $1,000, consisting of $300 in capital stock, $600 in retained earnings, and $100 in accumulated other comprehensive income. The fair value of the noncontrolling interest was $1,530 at the date of acquisition. Pillar uses the complete equity method to account for the investment on its own books. At the time of acquisition, all of Sally’s assets and liabilities were reported at amounts approximating fair value, except for unreported customer lists with a fair value of $200, with a remaining life of 4 years, straight-line, and plant assets that were undervalued by $600, with a remaining life of 10 years, straight-line. Goodwill arising from this acquisition is tested annually for impairment. Goodwill impairment for the period 2022-2024 is $400. Goodwill impairment for 2025 is $100. It is now December 31, 2025, 4 years after the acquisition, and you are preparing the consolidated financial statements. Sally reported net income of $800, an other comprehensive loss of $20, and declared and paid dividends of $150 for 2025. Sally’s January 1, 2025 shareholders’ equity accounts, taken from its trial balance, are as follows: Capital stock Retained earnings, January 1 Accumulated other comprehensive income, January 1 Total shareholders’ equity, January 1
$ 300 1,550 140 $ 1,990
Required a. Calculate total goodwill at the date of acquisition and its allocation to the controlling and noncontrolling interest. b. Calculate equity in net income of Sally for 2025, as reported on Pillar’s separate books, and noncontrolling interest in net income of Sally for 2025, as reported on the consolidated income statement. c. Calculate the December 31, 2025 balance for Investment in Sally, as reported on Pillar’s separate books. d. Prepare the eliminating entries, in journal form, to consolidate Pillar’s and Sally’s trial balances at December 31, 2025. ANS: a.
Total goodwill = $2,970 + $1,530 - ($1,000 + $200 + $600) = $2,700 Goodwill to controlling interest: $2,970 – [60% x ($1,000 + $200 + $600)] = $1,890 (70%) Goodwill to noncontrolling interest: $2,700 - $1,890 = $810 (30%)
b.
Sally’s reported net income $800 split 60:40 Revaluation write-offs: Customer lists $200/4 split 60:40 Plant assets $600/10 split 60:40 Goodwill impairment loss $100 split 70:30 ©Cambridge Business Publishers, 2023 5-70
Equity in Net Income of Sally $480 (30) (36) (70) $344
Noncontrolling Interest in Net Income of Sally $320 (20) (24) (30) $246
Advanced Accounting, 5th Edition
c.
d.
Investment, January 1, 2022 60% x change in retained earnings, 2022-2024 60% x change in AOCI, 2022-2024 60% customer lists write-off 2022-2024 60% plant assets write-off 2022-2024 70% x GW impairment 2022-2024 Investment, January 1, 2025 Equity in net income, 2025 Equity in OCL, 2025 Dividends, 2025 Investment, December 31, 2025
60% x ($1,550 – $600) 60% x ($140 - $100) 60% x [3 x ($200/4)] 60% x [3 x ($600/10)] 70% x $400 60% x ($20) 60% x $150
(C) Equity in net income of Sally
$2,970 570 24 (90) (108) (280) 3,086 344 (12) (90) $3,328 344
Equity in OCL of Sally Dividends Investment in Sally (E) Capital stock Retained earnings, beginning AOCI, beginning
12 90 242 300 1,550 140
Investment in Sally Noncontrolling interest in Sally (R) Customer lists Plant assets, net Goodwill
1,194 796 50 420 2,300
Investment in Sally Noncontrolling interest in Sally (O) Amortization expense Depreciation expense Impairment loss
1,892 878 50 60 100
Customer lists Plant assets, net Goodwill (N) Noncontrolling interest in net income of Sally
50 60 100
246 Noncontrolling interest in OCL of Sally Dividends Noncontrolling interest in Sally
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-71
8 60 178
23.
Topic: Consolidation of VIE, third year LO 2 Pebble Hotels uses a financial entity to obtain secured debt. On January 1, 2023, Pebble determined that the financial entity was a variable interest entity and Pebble is the primary beneficiary. Pebble has no equity interest in the VIE. The VIE’s trial balance on January 1, 2023 is as follows: Dr (Cr) Financial assets $ 15,000 Other assets 5,000 Liabilities (25,000) Capital stock (1,000) Retained deficit 6,000 Total $ 0 The VIE’s financial assets had a fair value of $16,000 and its other assets had a fair value of $3,500. The fair value of the VIE was $1,500. Pebble and the VIE were not previously under common control. The financial assets existing at January 1, 2023 were all liquidated as of January 1, 2025. Other assets, still held by the VIE, have a 10-year life, straight-line. Goodwill impairment to the beginning of 2025 is $500, and there is no impairment for 2025. Required a. Calculate the goodwill recognized at the date of acquisition. b. Calculate noncontrolling interest in the net income of the VIE, appearing on the 2025 consolidated income statement. c. Fill in the working paper below to consolidate the VIE with Pebble at December 31, 2025, three years since the VIE was first consolidated.
Financial assets Other assets Goodwill Liabilities Capital stock Retained earnings, beg AOCI, beg Noncontrolling interest in VIE Revenues Operating expenses NCI in income of VIE Total
ANS: a.
Pebble Dr (Cr) $ 155,000 900,000 -(720,000) (20,000) (300,000) (10,000) -(500,000) 495,000 -$ 0
Fair value of VIE Book value Revaluations: Financial assets Other assets Fair value of identifiable net assets Goodwill
©Cambridge Business Publishers, 2023 5-72
VIE Dr (Cr) $ 40,000 8,000 -(31,500) (1,000) (15,000) --(85,000) 84,500 -$ 0
Dr
Consol Dr (Cr)
Cr
$ (5,000) 1,000 (1,500)
$1,500
(5,500) $ 7,000
Advanced Accounting, 5th Edition
b. Noncontrolling Interest in NI $500
VIE’s reported net income for 2025 Revaluation write-offs for 2025: Other assets $(1,500)/10
150 $650
c.
24.
Financial assets Other assets Goodwill Liabilities Capital stock Retained earnings, beg AOCI, beg Noncontrolling interest in VIE
Pebble Dr (Cr) $ 155,000 900,000 -(720,000) (20,000) (300,000) (10,000) --
VIE Dr (Cr) $ 40,000 8,000 -(31,500) (1,000) (15,000) ---
Revenues Operating expenses NCI in income of VIE Total
(500,000) 495,000 -$ 0
(85,000) 84,500 -- (N) 650 $ 0 $23,300
Dr
Cr
(O) 150 (R) 6,500
1,200 (R)
(E) 1,000 (E) 15,000 16,000 (E) 5,300 (R) 650 (N) 150 (O) ______ $23,300
Consol Dr (Cr) $ 195,000 906,950 6,500 (751,500) (20,000) (300,000) (10,000) (21,950) (585,000) 579,350 650 $ 0
Topic: Acquisition entry, bargain purchase LO 3 Pearl Corporation acquires 75% of the voting stock of Skyworth Company by issuing no-par common stock with a fair value of $6,000. Consulting fees are $300 and registration costs are $80, both paid in cash. Vested stock options issued to replace options held by Skyworth employees have a fair value of $500. The fair value of the noncontrolling interest is $2,000. Skyworth’s trial balance at the date of acquisition is as follows, along with fair value information on its assets and liabilities:
Tangible assets Identifiable intangibles Liabilities Capital stock Retained earnings Accumulated other comprehensive income Total
Book Value Dr (Cr) $40,000 – (37,800) (6,000) 4,000 (200) $ 0
Fair Value Dr (Cr) $36,000 10,500 (37,900) – –
Required a. Calculate the gain on acquisition, recorded by Pearl on its own books. b. Prepare the journal entry to record the acquisition on Pearl’s books.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-73
ANS: a.
Fair value of identifiable net assets Less acquisition cost Less fair value of noncontrolling interest Gain on acquisition
$36,000 + $10,500 - $37,900 $6,000 + $500
$8,600 (6,500) (2,000) $ 100
b. Investment in Skyworth Acquisition expenses
6600 300 Capital stock Cash APIC—Stock options Gain on acquisition
25.
5,920 380 500 100
Topic: Consolidation eliminating entries, bargain purchase, date of acquisition LO 3 Packer Company acquired 80% of the shares of Skye Company at an acquisition cost of $58,000. The fair value of the noncontrolling interest was $9,500. At the date of acquisition, the fair values of Skye’s reported net assets equaled their book values, but Skye had previously unreported identifiable intangible assets with a fair value of $2,000. Skye’s trial balance at the date of acquisition appears below.
Current assets Plant & equipment, net Liabilities Capital stock Retained deficit Accumulated other comprehensive loss Total
Dr (Cr) $ 10,000 186,000 (130,000) (85,000) 15,000 4,000 $ 0
Required a. Calculate the gain on acquisition. At what amount did Packer value its investment in Skye at the date of acquisition? b. Prepare the eliminating entries (E) and (R) to consolidate the accounts of Packer and Skye at the date of acquisition. ANS: a.
Fair value of identifiable net assets Acquisition cost Fair value of NCI Gain on acquisition
$10,000 + $186,000 + 2,000 - $130,000 =
$ 68,000 (58,000) (9,500) $ 500
Investment in Skye, date of acquisition = $58,000 + $500 = $58,500
©Cambridge Business Publishers, 2023 5-74
Advanced Accounting, 5th Edition
b.
(E) Capital stock
85,000 Retained deficit AOCL Investment in Skye NCI in Skye
(R) Identifiable intangible assets NCI in Skye
2,000 3,700 Investment in Skye
26.
15,000 4,000 52,800 13,200
5,700
Topic: Consolidation working paper, noncontrolling interest, bargain purchase, first year LO 3 Price Company acquired 80% of Supervalu Corporation’s stock for $700 million in cash on January 1, 2025, when Supervalu Corporation’s book value was $550 million. The fair value of the noncontrolling interest was $100 million at the date of acquisition. Price uses the complete equity method to account for the investment on its own books. At the time of acquisition, all of Supervalu’s assets and liabilities were reported at amounts that approximated fair value, except for unreported identifiable intangible assets with a fair value of $500 million. These intangibles are appropriately recorded as assets per ASC Topic 805, and have a remaining life of 5 years, straight-line. It is now December 31, 2025, and you are preparing the consolidated financial statements. The separate trial balances of Price and Supervalu are below. Price Supervalu (in millions) Dr (Cr) Dr (Cr) Current assets $ 2,000 $ 400 Plant assets, net 5,320 3,300 Investment in Supervalu 1,390 -Current liabilities (700) (500) Long-term debt (3,860) (2,000) Common stock (200) (50) Retained earnings, beginning (2,800) (500) Dividends 400 -Revenues (8,000) (6,000) Equity in net income of Supervalu (440) -Gain on acquisition (250) -Cost of goods sold 6,250 4,000 Operating expenses 890 1,350 Total $ 0 $ 0 Required a. Calculate the gain on acquisition for this bargain purchase. b. Calculate equity in net income of Supervalu for 2025, as reported on Price’s separate books, and noncontrolling interest in net income of Supervalu for 2025, as reported on the consolidated income statement. c. Calculate the December 31, 2025 investment balance on Price’s separate books. d. Prepare a working paper to consolidate the trial balances of Price and Supervalue at December 31, 2025.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-75
ANS: a.
(in millions) Book value Identifiable intangibles Fair value of identifiable net assets Acquisition cost Fair value of noncontrolling interest Gain on acquisition
$ 550 500 1,050 (700) (100) $ 250
b.
Supervalu reported NI; $650, split 80:20 Revaluation write-offs: ID intangibles; $500/5, split 80:20 c.
$700 + $250 + $440 = $1,390
d.
Consolidation working paper, December 31, 2025
Equity in Net Income of Supervalu $ 520
Noncontrolling Interest in Net Income of Supervalu $ 130
(80) $ 440
(20) $ 110
(in millions) Current assets Plant assets, net Investment in Supervalu
Price Dr (Cr) $ 2,000 5,320 1,390
Supervalu Dr (Cr) $ 400 3,300 --
Identifiable intangible assets Current liabilities Long-term debt Common stock RE, beginning Noncontrolling interest
-(700) (3,860) (200) (2,800) --
-(500) (2,000) (50) (500) --
Dividends Revenues Equity in NI of Supervalu Gain on acquisition Cost of goods sold Operating expenses Noncontrolling interest in NI Total
400 (8,000) (440) (250) 6,250 890 ____-$ 0
-(6,000) --4,000 1,350 ____-$ 0
©Cambridge Business Publishers, 2023 5-76
Dr
(R)
500
(E) (E) (R)
50 500 10
(C)
Cr 440 (C) 440 (E) 510 (R) 100 (O)
110 (E) 110 (N)
440
(O) 100 (N) 110 $1,710
_____ $1,710
Consol Dr (Cr) $ 2,400 8,620 -400 (1,200) (5,860) (200) (2,800) (210) 400 (14,000) -(250) 10,250 2,340 110 $ 0
Advanced Accounting, 5th Edition
27.
Topic: Consolidation eliminating entries, date of acquisition, IFRS alternative LO 4 Pergo Hotels, headquartered in Portugal, issued 2,500 shares of common stock with a market value of €25 per share to acquire 85% of Simmons Resorts’ voting stock. The fair value of the noncontrolling interest was €8,000. Simmons’ book value was €30,000, comprised of €5,000 in capital stock and €25,000 in retained earnings. Its net assets are reported at fair value, except for the following: • • • •
Current assets are overvalued by €2,000. Plant & equipment is overvalued by €4,000. Previously unrecorded customer lists are valued at €10,000. A preacquisition contingent liability (potential lawsuit), valued at €3,000, is not recorded on Simmons’ books.
Pergo follows IFRS and uses the alternative method for valuing the noncontrolling interest and goodwill. Required a. Calculate the goodwill for this acquisition. b. Prepare the eliminating entries to consolidate the trial balances of Pergo and Simmons at the date of acquisition. ANS: a.
Acquisition cost (2,500 x €25) Book value Revaluations: Current assets P&E Customer lists Contingent liability Fair value of identifiable net assets Goodwill
b.
€30,000 (2,000) (4,000) 10,000 (3,000) 31,000 x 85%
(E) Capital stock Retained earnings
€62,500
26,350 €36,150 5,000 25,000
Investment in Simmons NCI in Simmons (R) Customer lists Goodwill
10,000 36,150 Current assets Plant & equipment, net Long-term liabilities Investment in Simmons NCI in Simmons
Test Bank, Chapter 5
25,500 4,500
2,000 4,000 3,000 37,000 150
©Cambridge Business Publishers, 2023 5-77
28.
Topic: Consolidation working paper, first year, IFRS alternative LO 4 P&G, headquartered in Belgium, acquires 90% of the voting stock of Saucy Co. on January 1, 2024 for €18,000 in cash. Saucy’s trial balance at the date of acquisition is as follows: Assets Current assets Plant & equipment Patents Customer order backlog Trademarks Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Total
Book Value Dr (Cr) € 100 5,000 200 0 0 (200) (1,400) (500) (2,000) (1,130) (70) € 0
Fair Value Dr (Cr) € 100 8,000 2,000 4,000 2,000 (200) (1,500)
As of January 1, 2024, the revaluations have the following estimated remaining lives: Plant & equipment 20 years, straight-line Patents 10 years, straight-line Customer order backlog 5 years, straight-line Trademarks 10 years, straight-line Goodwill Impairment in 2024: €300 Long-term liabilities 5 years, straight-line P&G follows IFRS and uses the alternative method to value goodwill and uses the complete equity method to account for its investment in Saucy on its own books. The separate trial balances of P&G and Saucy at December 31, 2024 appear below: P&G Saucy Dr (Cr) Dr (Cr) Current assets € 6,190 € 150 Plant & equipment, net 260,000 7,000 Patents -200 Investment in Saucy 18,231 Current liabilities (11,000) (250) Long-term liabilities (156,900) (1,500) Common stock, par (4,000) (500) Additional paid-in capital (40,000) (2,000) Retained earnings, beginning (70,000) (1,200) Dividends 800 100 Sales revenue (25,000) (10,000) Equity in net income of Saucy (321) -Cost of sales 15,000 6,000 Operating expenses 7,000 2,000 Total € 0 € 0 ©Cambridge Business Publishers, 2023 5-78
Advanced Accounting, 5th Edition
Required a. Calculate total goodwill for this acquisition, following the IFRS alternative method. b. Calculate equity in net income of Gillam and the noncontrolling interest in net income for 2024. c. Prepare a working paper to consolidate the trial balances of P&G and Gillam at December 31, 2024. ANS: a.
Book value Plant & equipment Patents Customer order backlog Trademarks Long-term liabilities Fair value of identifiable net assets
€ 3,700 3,000 1,800 4,000 2,000 (100) €14,400
Total goodwill = €18,000 – (90% x €14,400) = €5,040 b.
Saucy’s reported net income Revaluation write-offs: Plant & equipment; €3,000/20 Patents €1,800/10 Customer backlog; €4,000/5 Trademarks; €2,000/10 Goodwill impairment Long-term debt premium; €100/5 Equity in net income
Test Bank, Chapter 5
Equity in Net Income € 1,800
Noncontrolling Interest in Net Income € 200
(135) (162) (720) (180) (300) 18 € 321
(15) (18) (80) (20) -2 € 69
©Cambridge Business Publishers, 2023 5-79
c.
29.
Current assets Plant & equipment Patents Investment in Saucy
P&G Dr (Cr) € 6,190 260,000 -18,231
Saucy Dr (Cr) Dr € 150 7,000 (R) 3,000 200 (R) 1,800 --
Customer order backlog Trademarks Goodwill Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings, Jan. 1 Noncontrolling interest
---(11,000) (156,900) (4,000) (40,000) (70,000) --
---(250) (1,500) (500) (2,000) (1,200) --
Dividends Sales revenue Equity in NI Cost of sales Operating expenses Noncontrolling interest in NI Total
800 (25,000) (321) 15,000 7,000 -€ 0
100 (10,000) -- (C) 321 6,000 2,000 (O) 1,610 -- (N) 69 € 0 €21,560
(R) 4,000 (R) 2,000 (R) 5,040 (O) 20 (E) 500 (E) 2,000 (E) 1,200
Cr 150 (O) 180 (O) 231 (C) 3,330 (E) 14,670 (R) 800 (O) 200 (O) 300 (O) 100 (R)
370 (E) 1,070 (R) 59 (N) 90 (C) 10 (N)
______ €21,560
Consol Dr (Cr) € 6,340 269,850 1,820 -3,200 1,800 4,740 (11,250) (158,480) (4,000) (40,000) (70,000) (1,499) 800 (35,000) -21,000 10,610 69 € 0
Topic: Consolidation eliminating entries, second year, IFRS alternative LO 4
On January 2, 2024, Pelletier Hotels, headquartered in France, paid €41,600 to acquire 60% of Superb Destinations’ voting stock. The fair value of the noncontrolling interest was €20,000 at the date of acquisition. Superb’s book value at the date of acquisition was €20,000, comprised of €5,000 in capital stock and €15,000 in retained earnings. Its net assets were reported at fair value, except for the following: • • • •
Inventories (sold in 2024) were overvalued by €1,000. Plant & equipment (10-year life, straight-line) was overvalued by €20,000. Previously unrecorded identifiable intangibles (5-year life, straight-line) were valued at €25,000. Goodwill recognized for this acquisition was impaired by €500 in 2024 and €200 in 2025.
It is now December 31, 2025. Superb reported net income of €8,000 in 2024 and €10,000 in 2025 and declared no dividends. Superb does not report other comprehensive income. Pelletier uses the complete equity method to report its investment in Superb on its own books, following IFRS and using the alternative method for valuing the noncontrolling interest and goodwill.
©Cambridge Business Publishers, 2023 5-80
Advanced Accounting, 5th Edition
Required a. Calculate the original goodwill for this acquisition. b. Calculate equity in net income of Superb, and the noncontrolling interest in the net income of Superb, for 2025. c. Prepare the eliminating entries to consolidate the trial balances of Pelletier and Superb at December 31, 2025. All revaluation write-offs are reported in operating expenses. ANS: a.
Acquisition cost Book value Revaluations: Inventories P&E ID intangibles Fair value of identifiable net assets
€20,000 (1,000) (20,000) 25,000 24,000 x 60%
Goodwill
€41,600
14,400 €27,200
b.
Superb reported NI; $10,000, split 60:40 Revaluation write-offs: P&E; $20,000/10, split 60:40 ID intangibles; $25,000/5, split 60:40 Goodwill impairment loss c.
Equity in Net Income of Superb € 6,000
Noncontrolling Interest in Net Income of Superb € 4,000
1,200 (3,000) (200) € 4,000
800 (2,000) -€ 2,800
(C) Equity in net income of Superb
4,000 Investment in Superb
(E) Capital stock Retained earnings, beginning (1)
4,000
5,000 23,000 Investment in Superb (60%) NCI in Superb (40%)
16,800 11,200
(1) €15,000 + €8,000 = €23,000
(R) Identifiable intangibles Goodwill
20,000 26,700 Plant & equipment Investment in Superb (2) NCI in Superb (3)
18,000 27,900 800
(2) 60% x (€20,000 – €18,000) + €26,700 = €27,900 (3) 40% x (€20,000 – €18,000) = €800
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-81
(O) Operating expenses Plant & equipment
3,200 2,000 Identifiable intangibles Goodwill
(N) NCI in NI of Superb
5,000 200
2,800 NCI in Superb
30.
2,800
Topic: Consolidated statement of cash flows LO 5 Here are excerpts from the consolidated financial statements of Pier Resorts for 2025: Consolidated net income…………………………………………………… Net income attributable to the controlling interest..………….. Depreciation and amortization expense…………………………….. Gain on sale of plant assets…………………………………………………. Equity method investment income…………………………………….. Cash dividends received from equity method investments.... Increase in current operating assets………………………………….. Decrease in current operating liabilities……………………………...
$ 15,000 14,000 20,000 350 200 120 600 150
Required Use the above data to prepare the operating cash flow section of Pier’s consolidated statement of cash flows for 2025, using the indirect method. ANS: Consolidated net income + Depreciation and amortization expense - Gain on sale of plant assets - Undistributed equity method income ($200 - $120) - Increase in current operating assets - Decrease in current operating liabilities Cash flow from operating activities
©Cambridge Business Publishers, 2023 5-82
$ 15,000 20,000 (350) (80) (600) (150) $ 33,820
Advanced Accounting, 5th Edition
31.
Topic: Consolidated statement of cash flows LO 5 Palm acquired 80% of the voting stock of Shiro several years ago, at book value. Here are the consolidated balance sheets for Palm and Shiro, plus additional information: Consolidated Balance Sheets at December 31 2025
2024
Assets Cash Other current assets Plant assets Accumulated depreciation Identifiable intangibles Total assets
$
400 1,400 8,000 (3,000) 7,200 $14,000
350 1,200 6,000 (2,500) 8,100 $13,150
Liabilities & Equity Current liabilities Long-term debt Controlling interest in equity Noncontrolling interest in equity Total liabilities & equity
$ 3,400 6,000 3,000 1,600 $14,000
$ 2,800 5,660 3,180 1,510 $13,150
$
Additional information for 2025: 1. 2. 3. 4. 5. 6.
Consolidated net income is $240. Shiro reported net income of $600 on its own books and paid $150 in dividends. Consolidated depreciation expense was $700, and consolidated amortization expense was $900. Plant assets with an original cost of $500 were sold for $450. Palm paid $600 in dividends. Palm issued stock for $300.
Required Prepare a consolidated statement of cash flows for 2025.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-83
ANS: Cash from operating activities Consolidated net income Add (subtract) items not affecting cash: Depreciation expense Amortization expense Gain on retirement of plant assets (1) Changes in current assets and liabilities: Increase in other current assets Increase in current liabilities Net cash from operating activities Cash from investing activities Acquisition of plant assets (2) Sale of plant assets Cash from financing activities Increase in long-term debt Issuance of stock Dividends paid to controlling shareholders Dividends paid to noncontrolling shareholders Net increase in cash Plus cash balance, January 1 Cash balance, December 31
$ $
700 900 (150)
240
1,450
(200) 600
400 2,090
(2,500) 450
(2,050)
340 300 (600) (30)
$
10 50 350 400
(1) $2,500 + $700 – $3,000 = $200 accumulated depreciation on plant assets sold; $500 – $200 = $300 book value of plant assets sold; $450 - $300 = $150 gain on sale of plant assets. (2) X = Cost of plant assets acquired; $6,000 + X – $500 = $8,000; X = $2,500
©Cambridge Business Publishers, 2023 5-84
Advanced Accounting, 5th Edition
32.
Topic: Consolidated statement of cash flows LO 5 The consolidated financial statements of Pelican Company and Starling Corporation are below. Comparative Consolidated Balance Sheets December 31, 2025 Cash $ 7,000 Receivables 150,000 Inventories 35,000 Investments 65,000 Land 36,000 Equipment (net) 215,000 Goodwill 7,000 Total assets $515,000
2024 $ 15,000 140,000 30,000 50,000 20,000 180,000 10,000 $445,000
Current liabilities Noncurrent liabilities Total liabilities
$ 11,000 115,000 126,000
$ 18,000 75,000 93,000
Common stock Retained earnings Pelican’s shareholders’ equity Noncontrolling interest in Starling Total shareholders’ equity Total liabilities and shareholders’ equity
80,000 274,000 354,000 35,000 389,000 $515,000
80,000 242,000 322,000 30,000 352,000 $445,000
Consolidated Income Statement Year Ended December 31, 2025 Sales revenue Cost of goods sold Gross margin Operating expenses: Depreciation Goodwill impairment Other Consolidated net income Noncontrolling interest in income Net income attributable to Pelican
$250,000 (90,000) 160,000 (25,000) (3,000) (60,000) 72,000 (15,000) $ 57,000
Additional information: Unconsolidated investments are reported using the equity method. Included in sales revenue is $20,000 in income from equity method investments; $5,000 in dividends was received for these investments. Also included in sales revenue is a $5,000 gain on the sale of equipment with a book value of $30,000. No land was sold during 2020. Required Prepare the consolidated statement of cash flows for 2025.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-85
ANS: Consolidated Statement of Cash Flows Year Ended December 31, 2025 Cash flows from operating activities Consolidated net income Add (subtract) items not affecting cash: Depreciation $ 25,000 Goodwill impairment 3,000 Undistributed equity method income (1) (15,000) Changes in current assets and liabilities and nonoperating items: Gain on sale of equipment (5,000) Increase in receivables (10,000) Increase in inventories (5,000) Decrease in current liabilities (7,000) Net cash flows from operating activities Cash flows from investing activities Acquisition of land Sale of equipment (2) Acquisition of equipment (3) Cash flows from financing activities Net increase in noncurrent liabilities Dividends paid to controlling shareholders (4) Dividends paid to noncontrolling shareholders (5) Net decrease in cash Cash balance, January 1 Cash balance, December 31
(16,000) 35,000 (90,000)
40,000 (25,000) (10,000)
$ 72,000
13,000
(27,000) 58,000
(71,000)
5,000 $( 8,000) 15,000 $ 7,000
(1) $20,000 - $5,000 = $15,000 (2) $30,000 + $5,000 = $35,000 (3) $180,000 + X - $25,000 - $30,000 = $215,000; X = $90,000 (4) $242,000 + $57,000 – X = $274,000; X = $25,000 (5) $30,000 + $15,000 – X = $35,000; X = $10,000
©Cambridge Business Publishers, 2023 5-86
Advanced Accounting, 5th Edition
33.
Topic: Consolidated statement of cash flows LO 5 Here are the consolidated financial statements of Pali Ranch Resort and its 80%-owned subsidiary for the year ended December 31, 2025, plus supplementary information. Comparative Consolidated Balance Sheets December 31, 2025 Cash $ 125,000 Receivables 270,000 Inventories 950,000 Investments (equity method) 106,000 Property (net) 2,600,000 Goodwill 850,000 Total assets $4,901,000
2024 $ 110,000 205,000 940,000 100,000 2,435,000 1,000,000 $4,790,000
Current liabilities Long-term liabilities Total liabilities
$ 610,000 3,315,000 3,925,000
$ 600,000 3,250,000 3,850,000
Pali’s shareholders’ equity Noncontrolling interest Total stockholders’ equity Total liabilities and shareholders’ equity
820,000 156,000 976,000 $4,901,000
800,000 140,000 940,000 $4,790,000
Consolidated Income Statement Year Ended December 31, 2025 Sales and other income Cost of sales Gross margin Operating expenses Consolidated net income Noncontrolling interest in income Net income to controlling interest
$10,000,000 (6,500,000) 3,500,000 (3,400,000) 100,000 (20,000) $ 80,000
Supplementary information for 2025: 1. The subsidiary paid $20,000 in cash dividends. Pali paid $60,000 in cash dividends. 2. Operating expenses include depreciation expense of $1,200,000 and goodwill impairment losses of $150,000. 3. Sales and other income includes $10,000 equity in income from equity method investees. Cash dividends received from equity method investees was $4,000. 4. There were no sales of property, and property purchases were paid in cash. Required Prepare the consolidated statement of cash flows for 2025.
Test Bank, Chapter 5
©Cambridge Business Publishers, 2023 5-87
ANS: Consolidated Statement of Cash Flows Year Ended December 31, 2025 Cash flows from operating activities Consolidated net income Add (subtract) items not affecting cash: Depreciation $ 1,200,000 Goodwill impairment 150,000 Undistributed equity method income (1) (6,000) Changes in current assets and liabilities: Increase in receivables (65,000) Increase in inventories (10,000) Increase in current liabilities 10,000 Net cash flows from operating activities Cash flows from investing activities Acquisition of property (2) Cash flows from financing activities Net increase in long-term liabilities Dividends paid to controlling shareholders Dividends paid to noncontrolling shareholders (3) Net increase in cash Cash balance, January 1 Cash balance, December 31
$ 100,000
1,344,000
(65,000) 1,379,000
(1,365,000)
65,000 (60,000) (4,000)
1,000 15,000 110,000 $ 125,000
(1) $10,000 - $4,000 = $6,000 (2) $2,600,000 - $2,435,000 + $1,200,000 = $1,365,000 (3) $20,000 x 20% = $4,000
©Cambridge Business Publishers, 2023 5-88
Advanced Accounting, 5th Edition
TEST BANK CHAPTER 6 Consolidated Financial Statements: Intercompany Transactions MULTIPLE CHOICE 1.
2.
3.
Topic: Consolidation eliminating entries, intercompany services LO 1 A parent provides consulting services to its subsidiary during the year. The parent charged the subsidiary $500,000 for the services. The parent’s cost of providing the services is $300,000. The companies use service revenue and service expense, as appropriate, to record this transaction on their own books. The consolidation eliminating entry or entries related to the intercompany services include an adjustment to the parent’s accounts as follows: a. b. c. d.
a credit to service revenue, $300,000. a debit to service expense, $300,000. a credit to service expense, $500,000. a debit to service revenue, $500,000.
ANS:
d
Topic: Consolidation eliminating entries, intercompany services LO 1 A parent provides consulting services to its subsidiary during the year. The parent charged the subsidiary $500,000 for the services. The parent’s cost of providing the services is $300,000. The companies use service revenue and service expense, as appropriate, to record this transaction on their own books. The consolidation eliminating entry or entries related to the intercompany services include an adjustment to the subsidiary’s accounts as follows: a. b. c. d.
a credit to service expense, $500,000. a debit to service expense, $300,000. a debit to service revenue, $300,000. a credit to service revenue, $500,000.
ANS:
a
Topic: Consolidation eliminating entries, intercompany services LO 1 A subsidiary provides services to its parent during the year. Cost of services provided is $400,000. The subsidiary charged the parent $600,000 for the services. Which statement is false concerning eliminating entry (I) related to these intercompany services? a. b. c. d.
Eliminating entry (I) removes the subsidiary’s service expense of $400,000. Eliminating entry (I) removes the subsidiary’s service revenue of $600,000. Eliminating entry (I) removes the parent’s service expense of $600,000. Eliminating entry (I) has no effect on consolidated income.
ANS:
a
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-1
4.
5.
Topic: Intercompany services LO 1 A subsidiary provided services to its parent during the current year, at a cost of $120,000. The subsidiary charged the parent $200,000 for the services. On the year’s consolidated income statement, what should be reported with respect to this information? a. b. c. d.
Only service revenue, $200,000 Only service expense, $120,000 Service revenue $200,000 and service expense $120,000 Only service expense, $200,000
ANS:
b
Topic: Intercompany services LO 1 Slicker Company provides services to its parent, Pell Corporation, during the current year. This is how Pell and Slicker report these services on their respective income statements: Pell Service revenue Service expense
-$300,000
Slicker $300,000 250,000
How should the consolidated income statement for the year report these services?
6.
a. b. c. d.
Service Revenue $300,000 $300,000 $0 $0
ANS:
d
Service Expense $250,000 $550,000 $300,000 $250,000
Topic: Consolidation eliminating entries, intercompany services LO 1 A subsidiary charges $840,000 for services provided to a parent and reports this amount as service revenue. The price reflects a markup of 20% over cost. Both companies report service expenses as part of operating expenses. What eliminating entry is necessary with respect to this intercompany transaction? a. b. c. d.
Debit investment in subsidiary, credit operating expenses for $672,000 Debit service revenue, credit operating expenses for $840,000 Debit service revenue, credit operating expenses for $700,000 Debit beginning retained earnings, credit operating expenses for $140,000
ANS:
b
© Cambridge Business Publishers, 2023 6-2
Advanced Accounting, 5th Edition
7.
Topic: Intercompany services LO 1 A subsidiary charges $840,000 for services provided to a parent and reports this amount as service revenue. The price reflects a markup of 20% over cost. Both companies report service expenses as part of operating expenses. At what amount should service expenses be reported on the consolidated income statement? a. b. c. d.
$700,000 $840,000 $672,000 $140,000
ANS:
a $840,000/1.2 = $700,000
Use the following information to answer Questions 8 – 10 below. A parent loans $90,000 to its subsidiary on May 1 of the current year, at an annual interest rate of 2%. Interest payments are due semiannually on October 31 and April 30 of each year. The accounting year ends December 31. 8.
9.
Topic: Consolidation eliminating entries, intercompany loans LO 1 The consolidation eliminating entries at year-end include a debit to interest revenue in the amount of: a. b. c. d.
$1,200 $1,800 $ 300 $0
ANS:
a ($90,000 x 2%) x 8/12 = $1,200
Topic: Consolidation eliminating entries, intercompany loans LO 1 The consolidation eliminating entries at year-end include a credit to interest receivable in the amount of: a. b. c. d.
$1,200 $1,800 $ 300 $0
ANS:
c ($90,000 x 2%) x 2/12 = $300
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-3
10.
11.
Topic: Consolidation eliminating entries, intercompany loans LO 1 The consolidation eliminating entries at year-end include a debit to loan payable in the amount of: a. b. c. d.
$91,800 $91,200 $90,300 $90,000
ANS:
d
Topic: Consolidation eliminating entries, intercompany loans LO 1 A subsidiary borrowed $150,000 from its parent in a previous year. Interest payments at an annual rate of 3% are due semiannually on March 1 and September 1 of each year. The accounting year ends December 31. Consolidation eliminating entries for the year include a credit to interest expense in the amount of: a. b. c. d.
$4,500 $2,250 $ 750 $1,500
ANS:
a $150,000 x 3% = $4,500
Use the following information to answer Questions 12 and 13 below. A subsidiary obtained a $800,000 loan from its parent on April 1, 2023, at a 3% annual rate of interest. Interest is payable annually on March 31 of each year. The accounting year ends December 31. It is now December 31, 2025, and the loan is still outstanding. 12.
Topic: Consolidation eliminating entries, intercompany loans LO 1 Eliminating entries (I) at December 31, 2025 include a credit to interest receivable of: a. b. c. d.
$ 6,000 $18,000 $24,000 $12,000
ANS:
b ($800,000 x 3%) x 9/12 = $18,000
© Cambridge Business Publishers, 2023 6-4
Advanced Accounting, 5th Edition
13.
14.
Topic: Consolidation eliminating entries, intercompany loans LO 1 Eliminating entries (I) at December 31, 2025 include a credit to interest expense of: a. b. c. d.
$ 6,000 $18,000 $24,000 $12,000
ANS:
c $800,000 x 3% = $24,000
Topic: Intercompany loans LO 1 A parent loans $50,000 to its subsidiary at the start of the current year. The loan carries a 3% interest rate, and both the loan and its accrued interest are outstanding at year-end. How should the loan and interest be reported on the consolidated financial statements? a. b. c. d. ANS:
15.
$50,000 loan receivable and loan payable, and $1,500 interest receivable and payable on the consolidated balance sheet, but no recognition on the consolidated income statement. No recognition on the consolidated balance sheet but $1,500 interest expense and interest revenue on the consolidated income statement. No recognition on the consolidated balance sheet; $1,500 interest expense on the consolidated income statement No recognition on either the consolidated balance sheet or the consolidated income statement. d
Topic: Consolidation eliminating entries, intercompany services LO 1 A subsidiary provides services costing it $400,000 to its parent during the current year. The subsidiary charges the parent $750,000 for the services. The parent owes $50,000 for these services at year-end. Year-end consolidation eliminating entries for this transaction include: a. b. c. d.
Debit accounts payable $50,000, credit accounts receivable $50,000 Debit services expense $350,000, credit services revenue $350,000 Debit services revenue $400,000, credit services expense $400,000 Debit services revenue $750,000, credit services expense $400,000.
ANS:
a
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-5
16.
Topic: Intercompany loans, equity in net income and noncontrolling interest in net income calculation LO 1, 2 A 90%-owned subsidiary loans $100,000 to its parent partway through 2024. The loan carries a 2% interest rate. The subsidiary charges the parent $600 in interest in 2024, and $2,000 in interest in 2025. The parent owes interest of $100 at the end of 2025, and the loan balance is outstanding at the end of 2025. How are the parent’s 2025 equity in net income, reported on its own books, and consolidated income to the noncontrolling interest, reported on the consolidated income statement, affected by this intercompany loan?
a. b. c. d. ANS: 17.
18.
Equity in net income $1,800 increase $2,340 increase $1,980 increase no effect
Noncontrolling interest in net income $200 increase $260 increase $220 increase no effect
d
Topic: Equity in net income calculation, intercompany loans LO 1, 2 A wholly-owned subsidiary obtained a $500,000 loan from its parent on April 1, 2023, at a 3% annual rate of interest. Interest is payable annually on March 31 of each year. The accounting year ends December 31. It is now December 31, 2025, and the loan is still outstanding. The parent uses the complete equity method to report its investment in subsidiary on its own books. How does the intercompany loan affect the parent’s 2025 equity in net income calculation? a. b. c. d.
Subtract $15,000 Add $11,250 Subtract $3,750 no effect
ANS:
d
Topic: Equity in net income calculation, intercompany services LO 1, 2 During the current year, a parent provides services costing it $100,000 to its wholly-owned subsidiary, charging $140,000 for the services. At year-end, the subsidiary still owes the parent $5,000 for these services. How do these intercompany transactions affect the parent’s equity in income for the year, assuming the parent uses the complete equity method to report its investment on its own books? a. b. c. d.
$40,000 is deducted No effect $5,000 is added $140,000 is added
ANS:
b
© Cambridge Business Publishers, 2023 6-6
Advanced Accounting, 5th Edition
19.
20.
21.
Topic: Equity in net income calculation, intercompany loans LO 1, 2 A wholly-owned subsidiary has a $30,000 loan obtained from its parent in a previous year. The parent charges interest on the loan at a 3% annual rate, and interest is paid on June 1 and December 1 of each year. How does this intercompany loan affect the parent’s equity in income for the year, assuming the accounting year ends December 31, and the parent uses the complete equity method to report its investment on its own books? a. b. c. d.
$900 is deducted $75 is deducted No effect $900 is added
ANS:
c
Topic: Equity in net income calculation, intercompany loans LO 1, 2 A parent owns 80% of the voting stock of its subsidiary. The subsidiary has a $30,000 loan obtained from its parent in a previous year. The parent charges interest on the loan at a 3% annual rate, and interest is paid on June 1 and December 1 of each year. How does this intercompany loan affect the parent’s equity in income for the year, assuming the accounting year ends December 31 and the parent uses the complete equity method to report its investment on its own books? a. b. c. d.
$720 is deducted $60 is deducted $720 is added No effect
ANS:
d
Topic: Equity in net income and noncontrolling interest in net income calculation, intercompany land sales LO 2, 3 A parent has a 90% interest in its subsidiary. The subsidiary sold land at a gain to the parent in a previous year. The parent still holds the land. How does this transaction affect equity in net income and noncontrolling interest in net income for the current year, assuming the parent uses the complete equity method to report its investment on its own books? a. b. c. d.
No effect Only affects equity in net income Only affects noncontrolling interest in net income Affects equity in net income and noncontrolling interest in net income.
ANS:
a
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-7
22.
23.
24.
Topic: Equity in net income and noncontrolling interest in net income calculation, intercompany land sales LO 2, 3 A parent has a 90% interest in its subsidiary. The subsidiary sold land at a gain to the parent in the current year. The parent still holds the land at year-end. How does this transaction affect equity in net income and noncontrolling interest in net income for the current year, assuming the parent uses the complete equity method to report its investment on its own books? a. b. c. d.
No effect Only affects equity in net income Only affects noncontrolling interest in net income Affects equity in net income and noncontrolling interest in net income.
ANS:
d
Topic: Equity in net income and noncontrolling interest in net income calculation, intercompany land sales LO 2, 3 A parent has a 90% interest in its subsidiary. The parent sold land at a gain to the subsidiary in the current year. The subsidiary still holds the land at year-end. How does this transaction affect equity in net income and noncontrolling interest in net income for the current year, assuming the parent uses the complete equity method to report its investment on its own books? a. b. c. d.
No effect Only affects equity in net income Only affects noncontrolling interest in net income Affects equity in net income and noncontrolling interest in net income.
ANS:
b
Topic: Noncontrolling interest in net income calculation, intercompany land sales LO 2, 3 A parent sells land to its 85%-owned subsidiary at a gain of $70,000. The following year, the subsidiary sells the land to an outside entity for a gain of $30,000. How is the noncontrolling interest in net income affected in the year the subsidiary sells the land? a. b. c. d.
Increase of $10,500 Increase of $15,000 Decrease of $4,500 No effect
ANS:
d
© Cambridge Business Publishers, 2023 6-8
Advanced Accounting, 5th Edition
25.
26.
Topic: Noncontrolling interest in net income calculation, intercompany land sales LO 2, 3 An 85%-owned subsidiary sells land to its parent at a gain of $70,000. The following year, the parent sells the land to an outside entity for a gain of $30,000. How is the noncontrolling interest in net income affected in the year the parent sells the land? a. b. c. d.
Increase of $10,500 Increase of $15,000 Decrease of $4,500 No effect
ANS:
a 15% x $70,000 = $10,500
Topic: Equity in net income and noncontrolling interest in net income calculation, intercompany land sales LO 2, 3 In the current year, a 60%-owned subsidiary sells land with a book value of $10,000 to its parent for $8,000. The parent still holds the land at year-end. How are the parent’s current year equity in net income and consolidated income to the noncontrolling interest affected by this intercompany transaction?
a. b. c. d. ANS:
27.
Equity in net income $1,200 increase $1,200 decrease $2,000 increase no effect
Noncontrolling interest in net income $800 increase $800 decrease no effect no effect
a The $2,000 unconfirmed loss on the upstream intercompany land sale is removed from both equity in net income and noncontrolling interest in net income.
Topic: Consolidation eliminations, intercompany land sales LO 3 A 75%-owned subsidiary sells land costing it $100,000 to its parent in 2023 for $150,000. The parent still holds the land at the end of 2025. What eliminating entry (I) is required on the 2025 consolidation working paper? a. b. c. d.
Debit the subsidiary’s beginning retained earnings and credit land for $12,500. Debit the subsidiary’s beginning retained earnings and credit land for $50,000. Debit investment in subsidiary and credit land for $12,500. Debit investment in subsidiary and credit land for $50,000.
ANS:
b
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-9
28.
29.
Topic: Consolidation eliminations, intercompany land sales LO 3 A parent sells land costing it $100,000 to its 75%-owned subsidiary in 2023 for $150,000. The subsidiary still holds the land at the end of 2025. What eliminating entry (I) is required on the 2025 consolidation working paper? a. b. c. d.
Debit the subsidiary’s beginning retained earnings and credit land for $37,500. Debit the subsidiary’s beginning retained earnings and credit land for $50,000. Debit investment in subsidiary and credit land for $37,500. Debit investment in subsidiary and credit land for $50,000.
ANS:
d
Topic: Consolidation eliminations, intercompany land sales LO 3 A 75%-owned subsidiary sells land costing it $100,000 to its parent in 2023 for $150,000. The parent sells the land to an outside party for $175,000 in 2025. What eliminating entry (I) is required on the 2025 consolidation working paper? a.
c. d.
Debit the subsidiary’s beginning retained earnings and credit gain on sale of land for $50,000. Debit the subsidiary’s beginning retained earnings and credit gain on sale of land for $25,000. Debit investment in subsidiary and credit gain on sale of land for $50,000. Debit investment in subsidiary and credit gain on sale of land for $25,000.
ANS:
a
b.
30.
Topic: Consolidation eliminations, intercompany land sales LO 3 A parent sells land costing it $100,000 to its 75%-owned subsidiary in 2023 for $150,000. The subsidiary sells the land to an outside party for $175,000 in 2025. What eliminating entry (I) is required on the 2025 consolidation working paper? a.
c. d.
Debit the subsidiary’s beginning retained earnings and credit gain on sale of land for $50,000. Debit the subsidiary’s beginning retained earnings and credit gain on sale of land for $25,000. Debit investment in subsidiary and credit gain on sale of land for $50,000. Debit investment in subsidiary and credit gain on sale of land for $25,000.
ANS:
c
b.
© Cambridge Business Publishers, 2023 6-10
Advanced Accounting, 5th Edition
31.
32.
33.
34.
Topic: Intercompany land sales LO 3 A parent sells land carried on its books at $30,000 to a subsidiary in a prior year for $75,000. The subsidiary sells the land in the current year to a third party for $65,000. On the consolidated income statement for the current year, the gain (loss) on sale of land is: a. b. c. d.
$45,000 gain $10,000 loss $0 $35,000 gain
ANS:
d $65,000 - $30,000 = $35,000
Topic: Intercompany land sales LO 3 A parent sells land to its subsidiary for $40,000 and reports a loss of $5,000. At what amount should the land be shown on the consolidated balance sheet? a. b. c. d.
$ 5,000 $35,000 $40,000 $45,000
ANS:
d
Topic: Consolidation eliminating entries, intercompany land sales LO 3 When completing a consolidation working paper, the eliminating entry for a prior year intercompany transfer of land includes a debit to the subsidiary’s beginning retained earnings when the transfer is: a. b. c. d.
A downstream sale and the transfer was made at a gain An upstream sale and the transfer was made at a loss An upstream sale and the transfer was made at a gain A downstream sale and the transfer was made at a loss
ANS:
c
Topic: Consolidation eliminating entries, intercompany land sales LO 3 A parent sold land costing $400,000 to its subsidiary for $450,000 in a prior year. The subsidiary still holds the land at the end of the current year. On a working paper prepared to consolidate the financial statements of the parent and subsidiary at the end of the current year, the eliminating entry connected with this land includes a $50,000 credit to: a. b. c. d.
Investment in subsidiary Beginning retained earnings of the subsidiary Gain on sale of land Land
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-11
ANS: 35.
36.
37.
d
Topic: Consolidation eliminating entries, intercompany land sales LO 3 A subsidiary sold its parent some land at a profit of $10,000 in a prior year. The parent still holds the land. On a working paper prepared to consolidate the accounts of the parent and its subsidiary at the end of the current year, the eliminating entry connected with this land includes a $10,000 debit to: a. b. c. d.
Investment in subsidiary Beginning retained earnings Gain on sale of land No effect—elimination entry is not required
ANS:
b
Topic: Consolidation eliminating entries, intercompany land sales LO 3 In a prior year, a wholly-owned subsidiary sold land costing $100,000 to its parent for $125,000. In the current year, the parent sold the land to an outside company for $170,000. On a working paper prepared to consolidate the accounts of the parent and its subsidiary at the end of the current year, the eliminating entry connected with this land sale includes a. b. c. d.
a $25,000 debit to the investment in subsidiary account a $45,000 debit to beginning retained earnings a $25,000 credit to gain on sale of land no entry; the land is no longer in the consolidated entity
ANS:
c $125,000 - $100,000 = $25,000
Topic: Consolidation eliminating entries, intercompany land sales LO 3 A parent sold land costing $1,000,000 to its subsidiary in a prior year for $1,400,000. The land is still held by the subsidiary. The parent owns 80% of its subsidiary. The eliminating entry necessary for this intercompany transaction on the consolidation working paper at the end of the current year includes: a. b. c. d.
A debit to the Investment account for $320,000 A debit to the Investment account for $400,000 A debit to retained earnings for $320,000 A debit to retained earnings for $400,000
ANS:
b
© Cambridge Business Publishers, 2023 6-12
Advanced Accounting, 5th Edition
38.
39.
40.
Topic: Consolidation eliminating entries, intercompany land sales LO 3 A parent company sells land to its wholly-owned subsidiary in a prior year, reporting a gain of $20,000. In the current year, the subsidiary sells the land to an outside developer and reports a gain of $50,000. In the consolidation working paper at the end of the current year, the elimination of this transaction will result in: a. b. c. d.
A $70,000 decrease in land A $20,000 decrease in beginning retained earnings A $20,000 increase in gain on sale of land A $50,000 increase in investment in subsidiary
ANS:
c
Topic: Consolidation eliminating entries, intercompany land sales LO 3 On a worksheet prepared to consolidate the financial statements of a parent and subsidiary, eliminating entries made to remove intercompany gains on upstream sales of land sold in prior years, but still held within the consolidated entity, affect which account? a. b. c. d.
Investment in subsidiary Beginning retained earnings Equity in net income of the subsidiary Gain on sales of land
ANS:
b
Topic: Intercompany land sales LO 3 Which statement is true concerning the eliminating entries required for intercompany sales of land from a subsidiary to its parent? a. b. c. d.
ANS:
If the subsidiary sold the land to its parent in 2023 and the parent sells the land to outsiders in 2024, no eliminating entries are required in 2024. If the subsidiary sells the land to its parent in 2023, and the parent still holds the land at the end of the year, the eliminating entries for 2023 include an adjustment to the subsidiary’s beginning retained earnings balance. If the subsidiary sold the land to its parent in 2021, and the land was sold to outsiders by the parent in 2023, no eliminating entries are required in 2024. If the subsidiary sold the land to its parent in 2021 at a price that is less than the subsidiary’s book value, and the parent still holds the land in 2024, the eliminating entry for 2024 will reduce the land’s carrying value. c
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-13
41.
42.
43.
44.
Topic: Equity in net income and noncontrolling interest in net income calculation, intercompany merchandise sales LO 2, 4 A parent has a 60% interest in its subsidiary. Ending inventory profits on downstream merchandise sales: a. b. c. d.
Increase equity in net income and the noncontrolling interest in net income Only reduce equity in net income Reduce equity in net income and the noncontrolling interest in net income Only increase equity in net income
ANS:
b
Topic: Equity in net income and noncontrolling interest in net income calculation, intercompany merchandise sales LO 2, 4 A parent has a 60% interest in its subsidiary. Ending inventory profits on upstream merchandise sales: a. b. c. d.
Increase equity in net income and the noncontrolling interest in net income Only reduce equity in net income Reduce equity in net income and the noncontrolling interest in net income Only increase equity in net income
ANS:
c
Topic: Equity in net income and noncontrolling interest in net income calculation, intercompany merchandise sales LO 2, 4 A parent has a 60% interest in its subsidiary. Beginning inventory profits on downstream merchandise sales: a. b. c. d.
Increase equity in net income and the noncontrolling interest in net income Only reduce equity in net income Reduce equity in net income and the noncontrolling interest in net income Only increase equity in net income
ANS:
d
Topic: Equity in net income and noncontrolling interest in net income calculation, intercompany merchandise sales LO 2, 4 A parent has a 60% interest in its subsidiary. Beginning inventory profits on upstream merchandise sales: a. b. c. d.
Increase equity in net income and the noncontrolling interest in net income Only reduce equity in net income Reduce equity in net income and the noncontrolling interest in net income Only increase equity in net income
ANS:
a
© Cambridge Business Publishers, 2023 6-14
Advanced Accounting, 5th Edition
45.
46.
Topic: Equity in net income calculation, intercompany merchandise sales LO 2, 4 A wholly-owned subsidiary sells merchandise to its parent at a markup of 20% on cost. During the current year, the parent paid $600,000 for merchandise received from the subsidiary. By yearend, the parent has sold $420,000 of the merchandise to outside customers for $525,000, but still holds the other $180,000 in its ending inventory. The parent uses the complete equity method to record its investment in subsidiary on its own books. What is the impact of the above information on the parent’s equity in net income of subsidiary for the year, as reported on the parent’s books? a. b. c. d.
Subtract $30,000 Add $30,000 Subtract $70,000 Add $70,000
ANS:
a Unconfirmed profit on ending inventory is $180,000 – ($180,000/1.2) = $30,000
Topic: Noncontrolling interest in net income calculation, intercompany merchandise sales LO 2, 4 An 70%-owned subsidiary sells merchandise to its parent at a markup of 20% on cost. During the current year, the parent paid $600,000 for merchandise received from the subsidiary. By yearend, the parent has sold $420,000 of the merchandise to outside customers for $525,000, but still holds the other $180,000 in its ending inventory. What is the impact of the above information on noncontrolling interest in net income, reported on the consolidated income statement for the year? a. b. c. d.
Subtract $10,800 Subtract $9,000 Subtract $36,000 Subtract $30,000
ANS:
b Unconfirmed profit on ending inventory is $180,000 – ($180,000/1.2) = $30,000; this is an upstream sale so ($30,000 x 30%) = $9,000 is subtracted from noncontrolling interest in net income.
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-15
47.
Topic: Equity in net income calculation, intercompany merchandise sales LO 2, 4 A wholly-owned subsidiary sells merchandise to its parent at a markup of 20% on cost. During the current year, the parent paid $600,000 for merchandise received from the subsidiary. By yearend, the parent has sold $420,000 of the merchandise to outside customers for $525,000, but still holds the other $180,000 in its ending inventory. The parent uses the complete equity method to record its investment in subsidiary on its own books. What amount is reported on the consolidated financial statements for cost of goods sold and ending inventory?
a. b. c. d. ANS:
48.
49.
Consolidated cost of goods sold $420,000 $336,000 $350,000 $420,000
Consolidated ending inventory $180,000 $144,000 $150,000 $144,000
c Cost of goods sold, at cost, is $420,000/1.2 = $350,000 Ending inventory, at cost, is $180,000/1.2 = $150,000
Topic: Noncontrolling interest in net income calculation, intercompany merchandise sales LO 2, 4 A 90%-owned subsidiary sells merchandise to its parent at a markup of 20% on cost. The parent’s beginning inventory includes $120,000 purchased from the subsidiary. The parent’s ending inventory includes $156,000 purchased from the subsidiary. What is the impact of the above information on noncontrolling interest in net income, reported on the consolidated income statement for the year? a. b. c. d.
No effect Subtract $6,000 Subtract $600 Subtract $3,600
ANS:
c Confirmed profit on beginning inventory is $120,000 – ($120,000/1.2) = $20,000; unconfirmed profit on ending inventory is $156,000 – ($156,000/1.2) = $26,000. This is an upstream sale so ($26,000 - $20,000) x 10% = $600 is subtracted from noncontrolling interest in net income.
Topic: Noncontrolling interest in net income calculation, intercompany merchandise sales LO 2, 4 A parent sells merchandise to its 90%-owned subsidiary at a markup of 20% on cost. The parent’s beginning inventory includes $120,000 purchased from the subsidiary. The parent’s ending inventory includes $156,000 purchased from the subsidiary. What is the impact of the above information on noncontrolling interest in net income, reported on the consolidated income statement for the year? a. b. c. d.
No effect Subtract $6,000 Subtract $600 Subtract $3,000
© Cambridge Business Publishers, 2023 6-16
Advanced Accounting, 5th Edition
ANS: 50.
a This is a downstream sale so the noncontrolling interest is not affected.
Topic: Equity in net income calculation, intercompany merchandise sales LO 2, 4 A parent sells merchandise to its 90%-owned subsidiary at a markup of 20% on cost. The subsidiary’s beginning inventory includes $120,000 purchased from the parent. The subsidiary’s ending inventory includes $156,000 purchased from the parent. What is the impact of the above information on equity in net income, reported on the parent’s books, assuming the parent uses the complete equity method?
51.
a. b. c. d.
No effect Subtract $6,000 Subtract $5,400 Subtract $27,000
ANS:
b Confirmed profit on beginning inventory is $120,000 – ($120,000/1.2) = $20,000; unconfirmed profit on ending inventory is $156,000 – ($156,000/1.2) = $26,000. This is a downstream sale so ($26,000 - $20,000) = $6,000 is subtracted from equity in net income.
Topic: Equity in net income calculation, intercompany merchandise sales LO 2, 4 A parent has a wholly-owned subsidiary. At the end of the year, the subsidiary’s ending inventory includes $10,000 in unconfirmed profit on merchandise purchased from the parent. The subsidiary’s beginning inventory included unconfirmed profit of $25,000 on merchandise purchased from the parent. The parent’s ending inventory includes $38,000 in unconfirmed profit on merchandise purchased from the subsidiary. The parent’s beginning inventory included $40,000 in unconfirmed profit on merchandise purchased from the subsidiary. What is the effect of the above information on the parent’s equity in net income of the subsidiary for the year, assuming the parent uses the complete equity method? a. b. c. d.
Decrease of $17,000 Increase of $17,000 Increase of $15,000 Decrease of $43,000
ANS:
b $25,000 + $40,000 - $10,000 - $38,000 = $17,000 increase
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-17
52.
53.
Topic: Noncontrolling interest in net income calculation, intercompany merchandise sales LO 2, 4 A parent owns 80% of its subsidiary’s voting stock. At the end of the year, the subsidiary’s ending inventory includes $15,000 in unconfirmed profit on merchandise purchased from the parent. The subsidiary’s beginning inventory included unconfirmed profit of $10,000 on merchandise purchased from the parent. The parent’s ending inventory includes $40,000 in unconfirmed profit on merchandise purchased from the subsidiary. The parent’s beginning inventory included $35,000 in unconfirmed profit on merchandise purchased from the subsidiary. What is the effect of the above information on noncontrolling interest in net income for the year, reported on the consolidated income statement? a. b. c. d.
Decrease of $5,000 Increase of $5,000 Increase of $1,000 Decrease of $1,000
ANS:
d ($35,000 - $40,000) x 20% = $1,000 decrease
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 A parent owns 80% of its subsidiary’s voting stock. At the end of the year, the subsidiary’s ending inventory includes $15,000 in unconfirmed profit on merchandise purchased from the parent. The subsidiary’s beginning inventory included unconfirmed profit of $10,000 on merchandise purchased from the parent. The parent’s ending inventory includes $40,000 in unconfirmed profit on merchandise purchased from the subsidiary. The parent’s beginning inventory included $35,000 in unconfirmed profit on merchandise purchased from the subsidiary. Consolidation eliminating entries (I) related to this information include a debit to the subsidiary’s beginning retained earnings in the amount of a. b. c. d.
$28,000 $ 8,000 $35,000 $10,000
ANS:
c Unrealized profits on beginning inventory from upstream sales reduce the subsidiary’s beginning retained earnings balance.
© Cambridge Business Publishers, 2023 6-18
Advanced Accounting, 5th Edition
54.
55.
56.
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 A parent owns 80% of its subsidiary’s voting stock. At the end of the year, the subsidiary’s ending inventory includes $15,000 in unconfirmed profit on merchandise purchased from the parent. The subsidiary’s beginning inventory included unconfirmed profit of $10,000 on merchandise purchased from the parent. The parent’s ending inventory includes $40,000 in unconfirmed profit on merchandise purchased from the subsidiary. The parent’s beginning inventory included $35,000 in unconfirmed profit on merchandise purchased from the subsidiary. Consolidation eliminating entries (I) related to this information include a credit to inventory in the amount of a. b. c. d.
$55,000 $45,000 $44,000 $36,000
ANS:
a Unrealized profits on ending inventory = $15,000 + $40,000 = $55,000
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 A parent owns 80% of its subsidiary’s voting stock. At the end of the year, the parent’s ending inventory includes $20,000 in unconfirmed profit on merchandise purchased from the subsidiary. The parent’s beginning inventory included unconfirmed profit of $14,000 on merchandise purchased from the subsidiary. Consolidation eliminating entries (I) related to this information have what effect on the subsidiary’s beginning retained earnings? a. b. c. d.
Increase $20,000 Decrease $14,000 Decrease $27,200 No effect
ANS:
b Upstream profit on beginning inventory reduces beginning retained earnings.
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 A parent owns 80% of its subsidiary and sells merchandise to its subsidiary at a 25% markup on cost. The subsidiary's ending inventory includes $825,000 purchased from the parent. The subsidiary’s beginning inventory includes $750,000 purchased from the parent. Consolidation eliminating entries (I) have what effect on the subsidiary’s beginning retained earnings? a. b. c. d.
Increase $20,000 Decrease $14,000 Decrease $27,200 No effect
ANS:
d Downstream merchandise sales have no effect on beginning retained earnings.
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-19
57.
58.
59.
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 A parent sells merchandise to its subsidiary at a markup of 15% on cost. The subsidiary’s beginning inventory includes $69,000 in merchandise purchased from the parent. The parent sells $300,000 retail value merchandise to the subsidiary during the year. The subsidiary’s ending inventory includes $55,200 in merchandise purchased from the parent. Eliminations (I) for intercompany merchandise sales have a net effect of decreasing cost of goods sold by what amount? a. b. c. d.
$300,000 $309,000 $298,200 $301,800
ANS:
d Ending inventory profit = $55,200 – ($55,200/1.15) = $7,200 unconfirmed Beginning inventory profit = $69,000 – ($69,000/1.15) = $9,000 confirmed $7,200 - $300,000 - $9,000 = $301,800
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 A subsidiary sells merchandise to its parent at a markup of 15% on cost. The parent’s beginning inventory includes $36,800 in merchandise purchased from the subsidiary. The subsidiary sells $400,000 retail value merchandise to the parent during the year. The parent’s ending inventory includes $43,700 in merchandise purchased from the subsidiary. Eliminations (I) for intercompany merchandise sales have a net effect of decreasing ending inventory by what amount? a. b. c. d.
$ 5,700 $ 900 $10,500 no effect
ANS:
a $43,700 – ($43,700/1.15) = $5,700
Topic: Intercompany merchandise sales LO 4 A subsidiary sells merchandise to its parent at a markup of 30% on cost. In the current year, the parent paid $1,170,000 for merchandise received from the subsidiary. By year-end, the parent has sold $975,000 of the merchandise to outside customers for $1,200,000, but still holds the other $195,000 in its ending inventory. The parent did not have any merchandise purchased from the subsidiary in its beginning inventory. Which statement is true concerning how the above information is reported on the consolidated financial statements for the current year? a. b. c. d.
Consolidated sales should be $1,170,000. The consolidated ending inventory balance should be $195,000. Consolidated cost of goods sold should be $975,000. Consolidated cost of goods sold should be $750,000.
© Cambridge Business Publishers, 2023 6-20
Advanced Accounting, 5th Edition
ANS: 60.
d $975,000 – ($975,000/1.3) = $750,000
Topic: Intercompany merchandise sales LO 4 During the current year, a parent sold inventory priced at $800,000 to its subsidiary, and the parent’s profits on these sales amounted to $60,000. All inventory sold by the parent to the subsidiary was sold by the subsidiary to outside customers during the year. Here is what the parent and subsidiary report for total sales, cost of goods sold, and ending inventory at year-end (for total sales between the parent and subsidiary and to outside customers):
Inventory Sales revenue Cost of goods sold
Parent’s Books $ 300,000 5,000,000 4,000,000
Subsidiary’s Books $ 150,000 3,500,000 2,700,000
At what amounts should the year’s consolidated financial statements report these three balances? a. b. c. d. ANS:
61.
Inventory $450,000 $450,000 $390,000 $150,000
Sales Revenue $8,500,000 $7,700,000 $7,700,000 $3,500,000
Cost of Goods Sold $6,700,000 $5,900,000 $5,900,000 $1,900,000
b There is no unconfirmed profit in beginning or ending inventory, so the only eliminating entry is to debit sales revenue and credit cost of goods sold for $800,000.
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 During the current year, a parent sold $400,000 in merchandise to its subsidiary and reported a gross margin of $50,000 on these sales. The subsidiary still has merchandise purchased from the parent in its ending inventory, reported by the subsidiary at $80,000, on which the parent recorded $10,000 of profit for the current year. Which statement is true concerning the net effect of eliminating entries (I) related to this information? a. b. c. d.
Sales revenue is debited for $350,000 Cost of goods sold is credited for $390,000 Ending inventory is credited for $80,000 Sales revenue is debited for $70,000
ANS:
b The eliminating entries are: Sales revenue
400,000 Cost of goods sold
Cost of goods sold
10,000 Inventory
Test Bank, Chapter 6
400,000
10,000 © Cambridge Business Publishers, 2023 6-21
62.
Topic: Intercompany merchandise sales LO 4 A subsidiary sells merchandise to its parent at a markup of 25% on cost. In the current year, the parent paid $320,000 for merchandise received from the subsidiary. By year-end, the parent had sold $250,000 of the merchandise to outside customers for $340,000, but still holds the other $70,000 in its ending inventory. Which statement is false concerning the information related to these merchandise sales, as reported on the consolidated financial statements for the current year? a. b. c. d.
Consolidated sales are $340,000. Consolidated cost of goods sold is $200,000. Consolidated ending inventory is $56,000. Eliminating entries on the consolidation working paper reduce cost of goods sold by a net amount of $320,000.
ANS:
d The eliminating entries are: Sales revenue
320,000 Cost of goods sold
Cost of goods sold Inventory $70,000 – ($70,000/1.25) = $14,000
320,000 14,000 14,000
Use the following information to answer Questions 63 - 66. A subsidiary sells merchandise to its parent at a markup of 25% on cost. In the current year, the parent had $75,000 in merchandise purchased from the subsidiary in its beginning inventory. During the current year, the parent paid $750,000 for merchandise from the subsidiary. By year-end, the parent has sold $700,000 of merchandise purchased from the subsidiary to outside customers for $900,000. 63.
64.
Topic: Intercompany merchandise sales LO 4 What is consolidated sales revenue for the year? a. b. c. d.
$ 900,000 $1,650,000 $1,500,000 $ 750,000
ANS:
a
Topic: Intercompany merchandise sales LO 4 What is consolidated cost of goods sold for the year? a. b. c. d.
$ 900,000 $1,300,000 $ 560,000 $ 750,000
© Cambridge Business Publishers, 2023 6-22
Advanced Accounting, 5th Edition
ANS: 65.
66.
c ($700,000/1.25) = $560,000
Topic: Intercompany merchandise sales LO 4 What is consolidated inventory at year-end? a. b. c. d.
$125,000 $100,000 $ 25,000 $200,000
ANS:
b Ending inventory on the parent’s books is $75,000 + $750,000 - $700,000 = $125,000 $125,000/1.25 = $100,000
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 How do the consolidation working paper eliminating entries affect cost of goods sold? a. b. c. d.
net credit of $765,000 net credit of $725,000 net credit of $750,000 net credit of $740,000
ANS:
d The eliminating entries are: Retained earnings, beg.
15,000
Cost of goods sold $75,000 – ($75,000/1.25) = $15,000 Sales revenue
15,000
750,000 Cost of goods sold
Cost of goods sold Inventory $125,000 – ($125,000/1.25) = $25,000 67.
750,000 25,000 25,000
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 A parent company sells merchandise to a subsidiary company during the year at a price of $330,000, a 20% markup over its cost. The subsidiary company sells all the merchandise to outside customers during the year for $675,000. Which statement is true concerning the required consolidation eliminating entries related to these transactions? a. b. c. d.
Cost of goods sold is reduced by $330,000. Inventory is reduced by $55,000. Retained earnings is reduced by $55,000. Investment in subsidiary is reduced by $275,000.
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-23
ANS:
a The only elimination is: Sales revenue
330,000 Cost of goods sold
68.
69.
330,000
Topic: Intercompany merchandise sales, consolidated income to the controlling interest LO 2, 4 A parent’s beginning inventory contains $10,000 in unconfirmed profits on goods purchased from its subsidiary. The subsidiary's beginning inventory contains $8,000 in unconfirmed profits on goods purchased from its parent. The parent owns 80% of the subsidiary. By what amount is consolidated net income to the controlling interest increased by confirmation of profits on beginning inventories? a. b. c. d.
$16,000 $14,400 $18,000 $11,600
ANS:
a
Downstream profit confirmed Upstream profit confirmed Increase in consolidated income Noncontrolling interest in income: 20% x $10,000 Consolidated net income to controlling interest
$ 8,000 10,000 18,000 (2,000) $16,000
Topic: Intercompany merchandise sales, consolidated income to the noncontrolling interest LO 2, 4 A parent’s ending inventory contains $80,000 in unconfirmed profits on goods purchased from its subsidiary. The subsidiary's ending inventory contains $50,000 in unconfirmed profits on goods purchased from its parent. The parent owns 70% of the subsidiary. By what amount is consolidated income to the noncontrolling interest reduced by the adjustment for unconfirmed profits on ending inventories? a. b. c. d.
$39,000 $24,000 $15,000 $0
ANS:
c $80,000 x 30% = $24,000
© Cambridge Business Publishers, 2023 6-24
Advanced Accounting, 5th Edition
70.
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 A parent sells merchandise to a subsidiary at a markup over its cost. The subsidiary has sold all of the merchandise by year-end. Which of the following working paper eliminating entries are needed to consolidate the financial statements of the parent and subsidiary at year-end, concerning the intercompany sales of merchandise? a.
d.
Debit sales, credit cost of goods sold for the sales value of the merchandise sold by the parent. Debit sales, credit cost of goods sold for the sales value of the merchandise sold by the parent, and debit cost of goods sold and credit ending inventory for the unrealized profit included in the subsidiary’s ending inventory. Debit investment in subsidiary, credit ending inventory for the unrealized profit included in the subsidiary’s ending inventory. No eliminating entries are required.
ANS:
a
b. c.
Use the following information to answer Questions 71 - 75. A parent sells merchandise to its subsidiary at a markup of 20% on cost. In the current year, the subsidiary had $120,000 in merchandise purchased from the parent in its beginning inventory. During the current year, the subsidiary purchased $600,000 in merchandise from the parent, and sold merchandise purchased from the parent to outside customers for $900,000. At year-end, the subsidiary has $192,000 in merchandise purchased from the parent in its ending inventory. 71.
72.
Topic: Intercompany merchandise sales LO 4 What is consolidated sales revenue for the year? a. b. c. d.
$ 600,000 $ 900,000 $1,500,000 $ 888,000
ANS:
b
Topic: Intercompany merchandise sales LO 4 At what amount does the subsidiary report cost of goods sold on merchandise purchased from the parent on its own books? a. b. c. d.
$672,000 $500,000 $600,000 $528,000
ANS:
d $120,000 + $600,000 - $192,000 = $528,000
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-25
73.
74.
75.
Topic: Intercompany merchandise sales LO 4 What is consolidated cost of goods sold? a. b. c. d.
$ 440,000 $ 500,000 $ 750,000 $ 488,000
ANS:
a ($528,000/1.2) = $440,000
Topic: Intercompany merchandise sales LO 4 What is consolidated inventory at year-end? a. b. c. d.
$192,000 $100,000 $160,000 $172,000
ANS:
c $192,000/1.2 = $160,000
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 How do the consolidation working paper eliminating entries affect cost of goods sold? a. b. c. d.
net credit of $580,000 net credit of $588,000 net credit of $600,000 net credit of $568,000
ANS:
b The eliminating entries are: Investment in subsidiary
20,000
Cost of goods sold $120,000 – ($120,000/1.2) = $20,000 Sales revenue
20,000
600,000 Cost of goods sold
Cost of goods sold Inventory $192,000 – ($192,000/1.2) = $32,000
600,000 32,000 32,000
-$20,000 - $600,000 + $32,000 = $588,000 credit
© Cambridge Business Publishers, 2023 6-26
Advanced Accounting, 5th Edition
76.
Topic: Consolidation eliminating entries, intercompany merchandise sales LO 4 For intercompany merchandise sales, how do the consolidation eliminating entries differ between upstream and downstream sales? a. b. c. d.
ANS: 77.
78.
Unconfirmed intercompany profit on upstream ending inventory is debited to beginning retained earnings, while it is debited to investment in subsidiary for downstream sales. Sales revenue from upstream sales are eliminated but sales revenue from downstream sales are not. Confirmed intercompany profit on downstream beginning inventory is debited to investment in subsidiary, while it is debited to beginning retained earnings for upstream beginning inventory. The difference between intercompany profit on ending inventory and beginning inventory is an adjustment to investment in subsidiary for downstream sales but it is an adjustment to retained earnings for upstream sales. c
Topic: Noncontrolling interest in net income calculation, intercompany depreciable asset sales LO 2, 5 A parent owns 80% of its subsidiary. At the beginning of the current year, the subsidiary sells equipment carried on its books at $100,000 to its parent for $120,000. The equipment has a 10year remaining life, straight-line. What is the effect of the above on the noncontrolling interest in net income for the current year? a. b. c. d.
$3,600 decrease $4,000 decrease $400 increase No effect
ANS:
a Total unconfirmed upstream gain = $120,000 - $100,000 = $20,000 Gain confirmed during the year = $20,000/10 = $2,000 ($2,000 - $20,000) x 20% = $3,600 decrease
Topic: Equity in net income calculation, intercompany depreciable asset sales LO 2, 5 A parent owns 80% of its subsidiary. At the beginning of the current year, the parent sells equipment carried on its books at $40,000 to its subsidiary for $50,000. The equipment has a 10year remaining life, straight-line. What is the effect of the above on equity in net income for the current year, reported on the parent’s books, assuming the parent uses the complete equity method? a. b. c. d.
$9,000 decrease $8,000 decrease $7,200 decrease No effect
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-27
ANS:
79.
80.
81.
a Total downstream unconfirmed gain = $50,000 - $40,000 = $10,000 Gain confirmed during the year = $10,000/10 = $1,000 ($1,000 - $10,000) = $9,000 decrease
Topic: Equity in net income calculation, intercompany depreciable asset sales LO 2, 5 At the beginning of 2024, a wholly-owned subsidiary sold property carried on its books for $600,000 to its parent for $650,000. The property had a 5-year remaining life, straight-line. It is now the end of 2025, and the parent still holds the property. How is 2025 equity in net income, reported on the parent’s books, affected by this intercompany transaction? a. b. c. d.
$10,000 increase $10,000 decrease $40,000 decrease No effect
ANS:
a ($650,000 - $600,000)/5 = $10,000 gain confirmed in 2025
Topic: Equity in net income calculation, intercompany depreciable asset sales LO 2, 5 At the beginning of 2020, a parent sold property carried on its books for $500,000 to its 70%owned subsidiary for $700,000. The property had a 5-year remaining life, straight-line. It is now the end of 2025 (6 years later), and the subsidiary still holds the property. How is 2025 equity in net income, reported on the parent’s books, affected by this intercompany transaction? a. b. c. d.
$40,000 increase $40,000 decrease $28,000 increase No effect
ANS:
d The intercompany gain has been completely realized.
Topic: Noncontrolling interest in net income calculation, intercompany depreciable asset sales LO 2, 5 A parent owns 80% of its subsidiary. At the beginning of 2023, the subsidiary sells equipment carried on its books at $40,000 to its parent for $50,000. The equipment has a 5-year remaining life, straight-line. What is the effect of the above on the noncontrolling interest in net income, reported on the consolidated income statement for 2024, assuming the parent still holds the property? a. b. c. d.
$800 increase $400 increase $1,200 decrease No effect
ANS:
b Gain confirmed during the year = ($50,000 - $40,000)/5 = $2,000 $2,000 x 20% = $400 increase
© Cambridge Business Publishers, 2023 6-28
Advanced Accounting, 5th Edition
82.
83.
Topic: Consolidation eliminations, intercompany depreciable asset sales LO 5 At the beginning of the current year, the parent sold new equipment for which it paid $1,000,000 to its subsidiary for $1,500,000. The parent had not recorded any depreciation on the equipment. The equipment had a remaining life of 10 years at that time, straight-line. The subsidiary still has the equipment at year-end. On the consolidation working paper, the net effect of eliminations (I) will be to credit: a. b. c. d.
Accumulated depreciation for $50,000 Depreciation expense for $150,000 Equipment, net of accumulated depreciation for $450,000 Gain on sale of equipment for $500,000
ANS:
c $500,000 – ($500,000/10) = $450,000
Topic: Intercompany depreciable asset sales LO 5 On January 1, 2022, a subsidiary sold equipment to its parent for $600,000. The subsidiary’s original cost was $300,000 and as of January 1, 2022, $100,000 in depreciation had been recorded on the subsidiary’s books. At the date of sale, the equipment had a 5-year remaining life, straightline. It is now December 31, 2025 (4 years since the sale), and the parent still holds the equipment. How should this equipment be reported on the December 31, 2025 consolidated balance sheet and 2025 income statement?
a. b. c. d. ANS:
Equipment (cost) $300,000 $600,000 $300,000 $600,000
Accumulated Depreciation—Equipment $160,000 $320,000 $260,000 $260,000
Depreciation Expense $ 60,000 $ 80,000 $ 40,000 $ 40,000
c Cost = original cost to the subsidiary, $300,000 Accumulated depreciation = $100,000 + {[($300,000 - $100,000)/5] x 4} = $260,000 Depreciation expense = ($300,000 - $100,000)/5 = $40,000
Use the following information to answer Questions 84 – 87. On January 1, 2021, a subsidiary sold equipment to its parent for $550,000. The subsidiary’s original cost was $300,000 and as of January 1, 2021, $10,000 in depreciation had been recorded on the subsidiary’s books. At the date of sale, the equipment had a 10-year remaining life, straight-line. It is now December 31, 2024 (4 years since the sale), and the parent still holds the equipment.
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-29
84.
85.
86.
87.
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 In the consolidation eliminating entries for 2024, beginning retained earnings is debited for a. b. c. d.
$260,000 $156,000 $ 78,000 $182,000
ANS:
d Original gain = $550,000 – ($300,000 - $10,000) = $260,000 Unconfirmed gain at the beginning of the 4th year = $260,000 – [($260,000/10) x 3] = $182,000.
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 In the consolidation eliminating entries for 2024, depreciation expense is reduced by a. b. c. d.
$ 15,000 $ 26,000 $104,000 $ 25,000
ANS:
b $260,000/10 = $26,000
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 In the consolidation eliminating entries for 2024, the equipment account (gross cost) is reduced by a net amount of a. b. c. d.
$250,000 $260,000 $300,000 $274,000
ANS:
a $550,000 - $300,000 = $250,000
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 In the consolidation eliminating entries for 2024, the accumulated depreciation account is reduced by a net amount of a. b. c. d.
$104,000 $ 68,000 $ 94,000 $172,000
ANS:
c $78,000 - $10,000 + $26,000 = $94,000 (see eliminating entries below).
© Cambridge Business Publishers, 2023 6-30
Advanced Accounting, 5th Edition
Eliminating entries are: Retained earnings, beg. Accumulated depreciation
182,000 78,000 Equipment
260,000
Equipment
10,000 Accumulated depreciation
Accumulated depreciation
26,000 Depreciation expense
88.
89.
10,000
26,000
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 A parent owns 80% of its subsidiary. The parent sells equipment to the subsidiary for a gain of $80,000 at the beginning of 2023. At that time, the equipment had a remaining life of five years. The subsidiary uses straight-line depreciation with no residual value, and still holds the equipment at year-end. How will the intercompany eliminations for this transaction affect consolidated income for 2023, assuming the subsidiary still holds the equipment? a. b. c. d.
$12,800 increase $16,000 increase $48,000 decrease $64,000 decrease
ANS:
d Depreciation expense is reduced $80,000/5 = $16,000 Gain on sale of $80,000 is eliminated $80,000 - $16,000 = $64,000 decrease
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 A parent owns 80% of its subsidiary. The parent sells equipment to the subsidiary for a gain of $80,000 at the beginning of 2023. At that time, the equipment had a remaining life of five years. The subsidiary uses straight-line depreciation with no residual value. How will the intercompany eliminations for this transaction affect consolidated income for 2024, assuming the subsidiary still holds the equipment? a. b. c. d.
$12,800 increase $16,000 increase $48,000 decrease $64,000 decrease
ANS:
b Depreciation expense is reduced $80,000/5 = $16,000
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-31
90.
91.
92.
Topic: Intercompany depreciable asset sales LO 5 On January 1, 2023, a wholly-owned subsidiary sold equipment to its parent for $400,000. The subsidiary's books showed original cost and accumulated depreciation of $300,000 and $80,000, respectively, at the date of sale. The equipment had a remaining life of five years and is straightline depreciated. On December 31, 2024 (two years after the sale), the unconfirmed gain on the equipment is: a. b. c. d.
$ 72,000 $ 60,000 $108,000 $ 90,000
ANS:
c Total gain on the sale = $400,000 – ($300,000 - $80,000) = $180,000 Unconfirmed gain after two years = 3/5 x $180,000 = $108,000
Topic: Intercompany depreciable asset sales LO 5 A parent company sells equipment to its subsidiary on January 1, 2023 for $90,000. At the time, the equipment was reported on the parent’s books at a net book value of $60,000. The remaining life of the equipment as of January 1, 2023 is six years, and straight-line depreciation, no residual value. At what net value should this equipment be reported on a December 31, 2025 consolidated balance sheet (three years after the intercompany equipment sale)? a. b. c. d.
$90,000 $40,000 $45,000 $30,000
ANS:
d Consolidated depreciation expense is $60,000/6 = $10,000 per year Consolidated book value of equipment is $60,000 – (3 x $10,000) = $30,000
Topic: Intercompany depreciable asset sales LO 5 On January 1, 2023, a parent sold equipment to its wholly-owned subsidiary for $700,000. The parent’s books reported the equipment’s original cost and accumulated depreciation at $600,000 and $100,000, respectively, at the date of sale. At the time of the sale, the equipment had a remaining life of eight years, and is straight-line depreciated, no residual value. On December 31, 2024 (two years after the sale), the net effect of the consolidation eliminating entries is to reduce a. b. c. d.
The equipment account, at original cost, by $200,000 Depreciation expense by $25,000 Accumulated depreciation by $50,000 Beginning retained earnings by 175,000
© Cambridge Business Publishers, 2023 6-32
Advanced Accounting, 5th Edition
ANS:
b The eliminating entries for 2024 are: Investment in subsidiary Accumulated depreciation
175,000 25,000 Equipment
200,000
Equipment
100,000 Accumulated depreciation
100,000
Accumulated depreciation
25,000 Depreciation expense
93.
25,000
Topic: Intercompany depreciable asset sales LO 5 A parent owns 80% of its subsidiary. At the beginning of the current year, the subsidiary sells new equipment costing $40,000 to the parent for $85,000. The equipment has a 5-year remaining life at the time of sale, and straight-line depreciation is appropriate. The subsidiary has not recorded any depreciation on the equipment at the time of sale. It is now the end of the current year. The parent and subsidiary report the following balances related to the equipment:
Equipment Accumulated depreciation Gain on sale of equipment
Parent $85,000 17,000
Subsidiary
$45,000
What should be reported on the consolidated statements for the current year, with respect to this equipment?
94.
a. b. c. d.
Equipment, $85,000; Accumulated depreciation, $8,000; no gain Equipment, $40,000; Accumulated depreciation, $17,000; no gain Equipment, $85,000; Accumulated depreciation, $8,000; Gain, $9,000 Equipment, $40,000; Accumulated depreciation, $8,000; no gain
ANS:
d
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 On January 2, 2023, a parent sells a building with original cost of $100,000 and accumulated depreciation of $25,000 to its wholly-owned subsidiary for $60,000. The estimated remaining life of the building is 5 years, and straight-line depreciation is appropriate. On the December 31, 2025, the subsidiary still owns the building. The net effect of the working paper eliminations (I) for 2025 for this intercompany building sale is to a. b. c. d.
reduce 2025 depreciation expense by $3,000. add $15,000 to the original cost of the building. increase investment in subsidiary by $6,000. increase accumulated depreciation by $34,000.
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-33
ANS:
d Eliminating entries are: Building
15,000 Accumulated depreciation Investment in subsidiary
Building
6,000 9,000 25,000
Accumulated depreciation Depreciation expense
25,000 3,000
Accumulated depreciation 95.
3,000
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 At the beginning of 2023, a subsidiary sells equipment with a book value of $400,000 to its parent for $500,000. At the time of the sale, the equipment had a remaining life of 5 years, straight-line. The parent sold the equipment to an outside buyer for $470,000 at the end of 2024 (2 years later). The consolidation eliminating entry needed to consolidate the accounts of the parent and subsidiary at the end of 2024 has what effect? a. b. c. d.
Decrease depreciation expense by $40,000 Increase gain on sale by $60,000 Increase investment in subsidiary by $100,000 Reduce equipment (net) by $80,000
ANS:
b The eliminating entry is: Retained earnings, beg.
80,000 Depreciation expense Gain on sale
96.
20,000 60,000
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 At the beginning of 2023, a parent sells equipment with a book value of $400,000 to its subsidiary for $500,000. At the time of the sale, the equipment had a remaining life of 5 years, straight-line. The subsidiary sold the equipment to an outside buyer for $470,000 at the end of 2025 (3 years later). The consolidation eliminating entry needed to consolidate the accounts of the parent and subsidiary at the end of 2025 has what effect? a. b. c. d.
Decrease depreciation expense by $40,000 Increase gain on sale by $60,000 Increase investment in subsidiary by $60,000 Reduce equipment (net) by $80,000
ANS:
c The eliminating entry is: Investment in subsidiary
60,000 Depreciation expense Gain on sale
© Cambridge Business Publishers, 2023 6-34
20,000 40,000
Advanced Accounting, 5th Edition
97.
98.
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 At the beginning of 2021, a parent sells a building with a book value of $100,000 to its subsidiary for $150,000. The building has a 20-year remaining life at the time of sale. Straight-line depreciation is used, with no residual value. At the beginning of 2024, the subsidiary sells the building to an outside company for $200,000. On the 2024 consolidation working paper, the unconfirmed intercompany gain on the building sale is recognized in the amount of: a. b. c. d.
$40,000 $50,000 $45,000 $42,500
ANS:
d Total intercompany gain is $50,000, realized at a rate of $2,500/year. The building is sold to an outside company at the beginning of the 4th year, so the unconfirmed gain recognized in 2024 is $50,000 – ($2,500 x 3) = $42,500.
Topic: Consolidation eliminating entries, intercompany depreciable asset sales LO 5 On January 1, 2022, a wholly-owned subsidiary sells property with a book value of $100,000 to its parent for $140,000. The property has a 5-year remaining life at the time of sale, straight-line. On June 30, 2023, the parent sells the property to an outside company for $150,000. The accounting year for the consolidated entity ends December 31. Assume the parent has properly recorded depreciation on the property through June 30. On the consolidation working paper at December 31, 2023, eliminations (I) include a. b. c. d.
a $28,000 reduction in property, net. a $32,000 reduction in beginning retained earnings. a $8,000 reduction in depreciation expense a $32,000 increase in gain on sale of property.
ANS:
b The eliminating entry is: Retained earnings, beginning
32,000 Depreciation expense Gain on sale
Test Bank, Chapter 6
4,000 28,000
© Cambridge Business Publishers, 2023 6-35
PROBLEMS 1.
Topic: Consolidation eliminating entries, intercompany service transactions LO 1 During the current year, a parent company has the following transactions with its subsidiary: • •
The subsidiary provided services to the parent, billed at $50,000. The services cost the subsidiary $30,000. At the end of the year, the parent still owes the subsidiary $2,000 related to these services. The parent provided services to the subsidiary, billed at $8,000. The services cost the parent $6,500. At the end of the year, the subsidiary still owes the parent $500 related to these services.
Required a. Prepare the eliminating entries for the year-end consolidation working paper, related to these two transactions. Both companies report service costs in operating expenses and service revenues in an other revenues account. Amounts owing between parent and subsidiary are reported in accounts receivable and accounts payable. b. How should be above information be reported in the consolidated income statement? ANS: a.
Other revenues
50,000 Operating expenses
Accounts payable
50,000 2,000
Accounts receivable Other revenues
2,000 8,000
Operating expenses Accounts payable
8,000 500
Accounts receivable b.
500
Operating expenses, $36,500 (= $30,000 + $6,500).
© Cambridge Business Publishers, 2023 6-36
Advanced Accounting, 5th Edition
2.
Topic: Consolidation eliminating entries, intercompany service and financing transactions LO 1 Parrish has a wholly-owned subsidiary, Sultan. The accounting year ends December 31. During 2024, the following intercompany service and financing transactions occur: • Parrish provided administrative support services to Sultan, billed at $2,000, and costing Parrish $1,300. At the end of 2024 Sultan still owed Parrish $100 for services provided. • Sultan provided technological services to Parrish. During 2024, Sultan billed Parrish $4,500 for services provided. These services cost Sultan $3,200. At the end of 2024, Parrish still owed Sultan $250 for services provided. • Parrish loaned Sultan $20,000 on October 1, 2024, at an annual interest rate of 4%. Interest is paid yearly on June 30. Required Make the consolidation eliminating entries at December 31, 2024, related to these intercompany service and financing transactions. ANS: Service revenue
2,000 Service expense
Accounts payable
2,000 100
Accounts receivable Service revenue
100 4,500
Service expense Accounts payable
4,500 250
Accounts receivable
250
Interest for 2024 = 4% x $20,000 x ¼ = $200 Interest revenue
200 Interest expense
Interest payable
200 200
Interest receivable Loan payable
200 20,000
Loan receivable
Test Bank, Chapter 6
20,000
© Cambridge Business Publishers, 2023 6-37
3.
Topic: Consolidation eliminating entries, intercompany financing transactions LO 1 A subsidiary borrowed $200,000 from its parent on February 1, 2024. The yearly interest rate is 3%, and interest is due quarterly on the first day of May, August, November, and February. The principal of the loan is due on February 1, 2026. It is now December 31, 2024, the end of the accounting year, and the subsidiary has made interest payments as required. Required a. What balances appear in the December 31, 2024 trial balances of the parent and its subsidiary with respect to this intercompany loan? What balances should appear on the consolidated financial statements? b. Prepare the working paper eliminating entries needed for this intercompany loan at December 31, 2024. ANS: a. Parent Dr (Cr) $200,000 1,000
Loan receivable Interest receivable Interest payable Loan payable Interest revenue Interest expense
Subsidiary Dr (Cr)
(1,000) (200,000) (5,500) 5,500
Interest revenue/expense for 2024 = ($200,000 x 3%) x 11/12 = $5,500 Accrued interest = ($200,000 x 3%) x 2/12 = $1,000 No balances should appear in the consolidated statements. b. Interest revenue
5,500 Interest expense
Interest payable
5,500 1,000
Interest receivable Loan payable
200,000 Loan receivable
© Cambridge Business Publishers, 2023 6-38
1,000
200,000
Advanced Accounting, 5th Edition
4.
Topic: Consolidation eliminating entries, intercompany financing transactions with corrections LO 1 On May 31, 2023, a parent loaned $500,000 to its subsidiary. The loan carries an annual interest rate of 3 percent, due quarterly at the end of August, November, February and May of each year. The loan principal is due May 31, 2025. You are preparing the consolidation working paper for the parent and its subsidiary at December 31, 2024, the year-end for both companies. The subsidiary has paid all interest as required. However, while the parent has made appropriate year-end adjustments to its accounts, the subsidiary has neglected to do this. Required a. What balances appear in the December 31, 2024 trial balances of the parent and the subsidiary? b. Prepare the necessary adjusting entry needed on the subsidiary’s books prior to consolidation. c. Prepare the eliminating entries, in journal entry form, at December 31, 2024. ANS: a. Parent Dr (Cr) $500,000 1,250 --(15,000) --
Loan receivable Interest receivable Interest payable Loan payable Interest revenue Interest expense
b.
Subsidiary Dr (Cr) ---$(500,000) -13,750
Accrued interest at December 31 = 3% x $500,000 x 1/12 = $1,250 Interest revenue for 2024 = 3% x $500,000 = $15,000 Interest expense
1,250 Interest payable
1,250
c. Interest payable
1,250 Interest receivable
Loan payable
1,250 500,000
Loan receivable Interest revenue
15,000 Interest expense
Test Bank, Chapter 6
500,000
15,000
© Cambridge Business Publishers, 2023 6-39
5.
Topic: Consolidated balances, eliminating entries, intercompany merchandise and service transactions LO 1, 4 Salt is a subsidiary of Pretzel. Salt sells inventory to Pretzel at a markup of 20% on cost. During the current year, Salt sold inventory to Pretzel at a price of $30,000. Pretzel’s ending inventory included $3,120 purchased from Salt. Pretzel sold inventory purchased from Salt to outside customers at a price of $40,000. The cost to Pretzel of the inventory sold was $28,800. Pretzel provided services costing $10,000 to Salt, at a price of $15,000. Salt reports these services as operating expenses. Below is an excerpt from the consolidation working paper at the end of the year, relating to the above transactions.
Inventory, end of year Merchandise sales revenue Service revenue Cost of goods sold Operating expenses
Pretzel’s Books Dr (Cr) $ 3,120 (40,000) (15,000) 28,800 10,000
Salt’s Books Dr (Cr) $ -(30,000) -25,000 15,000
Consolidated Balances
Required a. Fill in the amounts that should appear in the consolidated balances column. b. What was Pretzel’s beginning balance of inventory purchased from Salt? c. Prepare, in journal form, the consolidation eliminating entries (I) that transform the balances reported in the separate accounts of Pretzel and Salt into the correct consolidated balances. ANS: a.
Inventory, end of year Merchandise sales revenue Service revenue Cost of goods sold Operating expenses b.
Pretzel’s Books Dr (Cr) $ 3,120 (40,000) (15,000) 28,800 10,000
Salt’s Books Dr (Cr) $ -(30,000) -25,000 15,000
Consolidated Balances Dr (Cr) $ 2,600 (40,000) 0 24,000 10,000
X + $30,000 - $28,800 = $3,120; X = $1,920
c.
Merchandise sales revenue
30,000 Cost of goods sold
Cost of goods sold
30,000 520
Inventory
520
$3,120 – ($3,120/1.2) = $520 © Cambridge Business Publishers, 2023 6-40
Advanced Accounting, 5th Edition
Retained earnings, beg.
320 Cost of goods sold
320
$1,920 – ($1,920/1.2) = $320 Service revenue
15,000 Operating expenses
6.
15,000
Topic: Equity in net income and noncontrolling interest in net income, revaluation write-offs and intercompany land sales LO 2, 3 A parent holds 60% of the voting stock of its subsidiary, and uses the complete equity method to report its investment on its own books. In 2023, the parent sold land to the subsidiary at a gain of $100,000. In 2024, the subsidiary sold land to the parent at a loss of $150,000. In 2025, both parcels of land were sold to outside parties. The subsidiary’s reported net income was $400,000 in 2023, $450,000 in 2024, and $500,000 in 2025. The parent’s acquisition of the subsidiary occurred at the beginning of 2020, and resulted in these revaluations: previously unreported identifiable intangibles, 5-year life, straight-line, $350,000, and goodwill of $2,000,000, of which 75% was allocated to the parent. There is no impairment of the identifiable intangibles, but goodwill was impaired by $50,000 in 2024. Required Compute equity in net income, reported on the parent’s books, and noncontrolling interest in net income, reported on the consolidated income statement, for each of the years 2023, 2024, and 2025. ANS: 2023 Reported NI Amortization expense Unrealized downstream land gain
2024 Reported NI Amortization expense Goodwill impairment loss Unrealized upstream land loss
2025 Reported NI Realized downstream land gain Realized upstream land loss
Test Bank, Chapter 6
Total $ 400,000 (70,000) (100,000) $ 230,000
Equity in NI $ 240,000 (42,000) (100,000) $ 98,000
NCI in NI $ 160,000 (28,000) -$ 132,000
$ 450,000 (70,000) (50,000) 150,000 $ 480,000
$ 270,000 (42,000) (37,500) 90,000 $ 280,500
$ 180,000 (28,000) (12,500) 60,000 $ 199,500
$ 500,000 100,000 (150,000) $ 450,000
$ 300,000 100,000 (90,000) $ 310,000
$ 200,000 -(60,000) $ 140,000
© Cambridge Business Publishers, 2023 6-41
7.
Topic: Equity in net income and noncontrolling interest in net income calculation, intercompany merchandise sales LO 2, 3 A parent owns 70% of the voting stock of its subsidiary. For the year 2025, the following information is available: • • •
•
The subsidiary reports net income of $150,000. Revaluation write-offs are $1,000 for impairment of previously unreported intangibles. The parent sells merchandise to the subsidiary at a markup of 25% on cost. Downstream merchandise sales total $800,000. The subsidiary’s beginning inventory contains $125,000 of merchandise purchased from the parent. Its ending inventory contains $143,750 of merchandise purchased from the parent. The subsidiary sells merchandise to the parent at a markup of 20% on cost. Upstream merchandise sales total $750,000. The parent’s beginning inventory contains $180,000 of merchandise purchased from the subsidiary. Its ending inventory contains $210,000 of merchandise purchased from the subsidiary.
Required Calculate equity in net income, reported on the parent’s books, and the noncontrolling interest in net income, reported on the consolidated income statement, for 2025. ANS: Reported NI - Revaluation write-off + Confirmed BI profit, downstream + Confirmed BI profit, upstream - Unconfirmed EI profit, downstream - Unconfirmed EI profit, upstream
8.
Total $150,000 (1,000) 25,000 30,000 (28,750) (35,000) $140,250
Equity in NI $105,000 (700) 25,000 21,000 (28,750) (24,500) $97,050
NCI in NI $45,000 (300) -9,000 -(10,500) $43,200
Topic: Equity in net income calculation with intercompany transactions LO 2, 4, 5 The following information is available concerning transactions between a parent and its whollyowned subsidiary for the current year. •
•
The parent sells merchandise to the subsidiary at a markup of 20% on cost. The subsidiary’s beginning inventory includes $30,000 purchased from the parent, and its ending inventory includes $42,000 purchased from the parent. Total sales from the parent to the subsidiary were $800,000. The subsidiary sold plant assets to the parent in a prior year, charging the parent $650,000. The plant assets had been reported on the subsidiary’s books at a net book value of $350,000. The plant assets had a remaining life of 10 years at the time of the transaction, straight-line, and the transaction occurred 3 years ago.
Required Compute equity in net income of the subsidiary, reported on the parent’s books, for the current year. The parent uses the complete equity method, the subsidiary reports net income of $60,000 on its own books, and revaluation write-offs consist of goodwill impairment of $15,000. © Cambridge Business Publishers, 2023 6-42
Advanced Accounting, 5th Edition
ANS: Subsidiary reported net income Goodwill impairment loss Beginning inventory profit confirmed $30,000 – ($30,000/1.2) Ending inventory profit unconfirmed $42,000 – ($42,000/1.2) Confirmed gain on sale of plant assets ($650,000 - $350,000)/10 Equity in net income 9.
$ 60,000 (15,000) 5,000 (7,000) 30,000 $ 73,000
Topic: Equity in net income and noncontrolling interest in net income, intercompany transactions LO 2, 4, 5 A parent company consolidates its 75%-owned subsidiary. It is now December 31, 2024. The following information is available: •
The subsidiary’s reported net income for 2024 is $40,000.
•
The subsidiary sells merchandise to the parent at a markup of 20% on cost. The parent’s 2024 ending inventory balance contains $2,400 in merchandise purchased from the subsidiary. The parent’s 2024 beginning inventory contains $2,160 in merchandise purchased from the subsidiary. Total sales price of merchandise transferred between the subsidiary and the parent in 2024 is $60,000.
•
The parent sold equipment to the subsidiary at the beginning of 2022, at a gain of $25,000. The equipment had a 5-year remaining life at the time, straight-line. The subsidiary still holds the equipment at the end of 2024.
•
Write-offs of identifiable intangibles recognized when the parent acquired the subsidiary total $10,000. There are no other revaluation write-offs for 2024.
•
The parent uses the complete equity method to report its investment in subsidiary on its own books.
Required Calculate equity in net income for 2024, reported on the parent’s books, and the noncontrolling interest in net income for 2024, reported on the consolidated income statement. ANS:
Subsidiary reported net income Write-off of identifiable intangibles Upstream confirmed BI profit [= $2,160 – ($2,160/1.2)] Upstream unconfirmed EI profit [= $2,400 – ($2,400/1.2)] Confirmed profit, downstream equipment sale (= $25,000/5)
Test Bank, Chapter 6
Total $40,000 (10,000)
Equity in NI $30,000 (7,500)
Noncontrolling Interest in NI $10,000 (2,500)
360
270
90
(400)
(300)
(100)
5,000 $34,960
5,000 $27,470
___-$ 7,490
© Cambridge Business Publishers, 2023 6-43
10.
Topic: Equity in net income calculation with intercompany transactions LO 2, 3, 4, 5 The following information is available concerning transactions between a parent and its whollyowned subsidiary for the current year. • •
•
The subsidiary purchased land from its parent in a prior year, at a cost of $400,000. The parent had reported the land on its books at $300,000. The subsidiary still holds the land. The parent sells merchandise to the subsidiary. The subsidiary’s beginning inventory includes intercompany profit of $50,000, and its ending inventory includes intercompany profit of $65,000. Total sales from the parent to the subsidiary were $600,000. The parent sold equipment to the subsidiary at the beginning of the current year for $300,000 and reported a gain of $45,000. The equipment has a 5-year life, straight-line.
Required Compute equity in net income of the subsidiary, reported on the parent’s books, for the current year. The parent uses the complete equity method, the subsidiary reports net income of $100,000 on its own books, and there are no revaluation write-offs for the year. ANS: Subsidiary reported net income Beginning inventory profit confirmed Ending inventory profit unconfirmed Unconfirmed gain on sale of equipment Confirmed gain on sale of equipment ($45,000/5) Equity in net income 11.
$100,000 50,000 (65,000) (45,000) 9,000 $ 49,000
Topic: Comprehensive consolidation eliminating entries, intercompany merchandise sales LO 2, 4 A parent company acquired all of the voting stock of its subsidiary on January 1, 2022 at a cost of $250,000, when the subsidiary’s book value was $80,000, consisting of $1,000 capital stock and $79,000 retained earnings. The excess of acquisition cost over book value was attributed to previously unreported identifiable intangible assets (10-year life, straight-line) of $50,000, and goodwill, which is not impaired. The parent sells merchandise to its subsidiary on a regular basis. During 2024, the subsidiary recorded total intercompany purchases of $180,000. Its beginning inventory included a markup of $6,500 and its ending inventory included a markup of $10,000. The subsidiary’s book value at the beginning of 2024 was $102,000, consisting of $1,000 capital stock and $101,000 retained earnings. The subsidiary reports net income of $17,000 for 2024 and declares no dividends. The parent uses the complete equity method to report its investment in the subsidiary on its own books. Required a. Compute equity in net income for 2024, and the December 31, 2024 balance for the parent’s investment in its subsidiary, as reported on the parent’s books. b. Prepare eliminating entries (C), (I), (E), (R) and (O) to consolidate the trial balances of the parent and its subsidiary at December 31, 2024.
© Cambridge Business Publishers, 2023 6-44
Advanced Accounting, 5th Edition
ANS: a. Reported NI Amortization expense Confirmed BI profit Unconfirmed EI profit Equity in NI
$ 17,000 (5,000) 6,500 (10,000) $ 8,500
Acquisition cost Change in RE to beginning of year ($101,000 - $79,000) Intangibles write-off to beginning of year ($50,000/10 x 2) Unconfirmed BI profit as of beginning of year Investment in subsidiary, beginning of year Equity in NI for current year Investment balance, end of year b. (C) Equity in NI
$250,000 22,000 (10,000) (6,500) 255,500 8,500 $264,000
8,500 Investment in subsidiary
(I-1) Sales revenue
8,500
180,000 Cost of goods sold
(I-2) Investment in subsidiary
180,000
6,500 Cost of goods sold
(I-3) Cost of goods sold
6,500
10,000 Inventory
(E) Capital stock Retained earnings, beg.
10,000
1,000 101,000 Investment in subsidiary
(R) Identifiable intangibles Goodwill
102,000
40,000 120,000 Investment in subsidiary
(O) Amortization expense
5,000 Identifiable intangibles
Test Bank, Chapter 6
160,000
5,000
© Cambridge Business Publishers, 2023 6-45
12.
Topic: Consolidation eliminating entries, intercompany land transactions LO 3 The following information relates to land sales between a parent and its subsidiary. •
In 2022, the subsidiary sold land to its parent at a loss of $3,000. In 2024, the parent sold the land to an outside company at a gain of $5,000.
•
In 2022, the subsidiary sold land at a gain of $10,000 to the parent. The parent sold the land at a loss of $2,000 in 2023.
•
In 2023, the parent sold land to its subsidiary at a gain of $7,000. The subsidiary still holds the land at the end of 2024. In 2024, the parent sold land with a book value of $12,000 to the subsidiary for $4,000. The subsidiary still holds the land at the end of 2024.
•
Required Prepare the eliminating entries (I) for the 2024 consolidation working paper for the above intercompany transactions. ANS: Gain on sale of land
3,000 Retained earnings, beg.
Investment in subsidiary
3,000 7,000
Land Land
8,000 Loss on sale of land
13.
7,000 8,000
Topic: Consolidation eliminating entries, intercompany merchandise transactions LO 4 A parent and its subsidiary engage in intercompany merchandise transactions. Information on these transactions for the current year is as follows: • • • • • •
Total sales from the parent to the subsidiary were $400,000. Total sales from the subsidiary to the parent were $750,000. The subsidiary’s beginning inventory contained $85,000 in merchandise purchased from the parent. This merchandise cost the parent $60,000. The parent’s beginning inventory contained $100,000 in merchandise purchased from the subsidiary. This merchandise cost the subsidiary $80,000. The subsidiary’s ending inventory contained $92,000 in merchandise purchased from the parent. This merchandise cost the parent $64,000. The parent’s ending inventory contained $110,000 in merchandise purchased from the subsidiary. The merchandise cost the subsidiary $86,000.
Required Prepare the working paper eliminating entries (I) for the intercompany inventory transactions required to consolidate the trial balances of the parent and its subsidiary for the year.
© Cambridge Business Publishers, 2023 6-46
Advanced Accounting, 5th Edition
ANS: Sales revenue
1,150,000 Cost of goods sold
1,150,000
$400,000 + $750,000 = $1,150,000 Investment in subsidiary
25,000 Cost of goods sold
25,000
$85,000 - $60,000 = $25,000 Retained earnings, beg.
20,000 Cost of goods sold
20,000
$100,000 - $80,000 = $20,000 Cost of goods sold
28,000 Inventories
28,000
$92,000 - $64,000 = $28,000 Cost of goods sold
24,000 Inventories
24,000
$110,000 - $86,000 = $24,000 14.
Topic: Consolidation eliminating entries, intercompany merchandise transactions LO 4 A parent and its subsidiary began engaging in intercompany merchandise sales this year. Total retail value of upstream sales for the year were $100,000; the retail value of downstream sales was $35,000. The subsidiary sells to the parent at a markup of 15% on cost; the parent sells to the subsidiary at a markup of 25% on sales price. Upstream sales of $28,750 remain in the parent’s ending inventory. Downstream sales of $10,000 remain in the subsidiary’s ending inventory. Required a. Calculate the unconfirmed profit in the parent’s ending inventory and in the subsidiary’s ending inventory. b. Prepare the working paper eliminating entries (I) for the intercompany inventory transactions, required to consolidate the trial balances of the parent and its subsidiary for the year. ANS: a.
Unconfirmed upstream profit in the parent’s ending inventory: ($28,750 - ($28,750/1.15) = $3,750 Unconfirmed downstream profit in the subsidiary’s ending inventory: $10,000 x 25% = $2,500
b. Cost of goods sold
6,250 Inventory
6,250
$3,750 + $2,500 = $6,250 Sales revenue
135,000 Cost of goods sold
135,000
$100,000 + $35,000 = $135,000 Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-47
15.
Topic: Consolidation eliminating entries, intercompany merchandise transactions LO 4 Intercompany sales for the current year between a parent and its subsidiary, and related inventory balances are as follows:
Beginning inventory acquired from affiliate, reported on buyer’s books Ending inventory acquired from affiliate, reported on buyer’s books Intercompany sales to affiliate
Parent
Subsidiary
$ 30,000
$ 18,000
27,600 500,000
19,200 400,000
The parent sells merchandise to its subsidiary at a markup of 20% on cost. The subsidiary sells merchandise to its parent at a markup of 25% on cost. Required Prepare the consolidation eliminating entries (I) required to consolidate the trial balances of Pullman and Sunset. ANS: Cost of goods sold
8,720
Inventory $27,600 – ($27,600/1.25) = $5,520; $19,200 – ($19,200/1.2) = $3,200 Sales revenue
8,720
900,000 Cost of goods sold
900,000
$500,000 + $400,000 = $900,000 Investment in subsidiary Retained earnings, beg.
3,000 6,000
Cost of goods sold $30,000 – ($30,000/1.25) = $6,000; $18,000 – ($18,000/1.2) = $3,000
© Cambridge Business Publishers, 2023 6-48
9,000
Advanced Accounting, 5th Edition
16.
Equity in net income calculation, comprehensive eliminating entries, intercompany merchandise transactions LO 2, 4 Percy Footwear acquired all the voting stock of Simali Inc. at the beginning of 2021. The acquisition cost was $400,000, and Simali’s book value at that time consisted of $5,000 in capital stock and $40,000 in retained earnings. Revaluation information for Simali’s identifiable net assets is as follows: • • • •
Plant assets with a 20-year remaining life, straight-line, were overvalued by $100,000 Inventory (sold in 2021) was overvalued by $10,000 Previously unrecorded indefinite life developed technology was valued at $175,000; impairment to the beginning of 2025 was $15,000, and there is no impairment for 2025. Goodwill was not impaired as of the beginning of 2025; impairment in 2025 was $60,000.
It is now the end of 2025 (five years after the acquisition). Simali’s retained earnings at the beginning of 2025 is $95,000, and it reports net income of $80,000 for 2025. It declares no dividends. Percy uses the complete equity method to report its investment in Simali on its own books. Simali sells merchandise to Percy on a regular basis, at a markup of 20 percent on cost. Total sales made to Percy in 2025 were $500,000. Percy’s beginning inventory balance has $14,400 in merchandise purchased from Simali. Percy’s ending inventory balance has $20,400 in merchandise purchased from Simali. Required a. Calculate equity in net income for 2025, reported on Percy’s books. b. Calculate the December 31, 2020 balance for investment in Simali, reported on Percy’s books. c. Calculate the original balance for goodwill, reported for this acquisition. d. Prepare the consolidation eliminating entries (C), (I), (E), (R), and (O) for 2025, in journal entry form. All revaluation write-offs for 2025 are reported in operating expenses. ANS: a. Reported net income Revaluation write-offs: Plant assets $100,000/20 Goodwill impairment Intercompany transactions: Confirmed profit, beginning inventory $14,400 – ($14,400/1.2) Unconfirmed profit, ending inventory $20,400 – ($20,400/1.2) Equity in net income
Test Bank, Chapter 6
$ 80,000 5,000 (60,000) 2,400 (3,400) $ 24,000
© Cambridge Business Publishers, 2023 6-49
b. Investment, date of acquisition Simali’s change in retained earnings, 2021-2024 ($95,000 - $40,000) Revaluation write-offs to beginning of 2024: Plant assets ($100,000/20) x 4 Inventory ID intangibles Intercompany transactions: Unconfirmed profit, ending inventory $14,400 – ($14,400/1.2) Investment, December 31, 2024 Equity in net income, 2025 Investment, December 31, 2025 c. Acquisition cost Book value Excess over book value Revaluations: Plant assets Inventory ID intangibles Goodwill d.
$400,000 55,000 20,000 10,000 (15,000) (2,400) 467,600 24,000 $491,600
$ 400,000 (45,000) 355,000 (100,000) (10,000) 175,000
(C) Equity in net income of Simali Investment in Simali
24,000
(I-1) Retained earnings, beginning Cost of goods sold
2,400
(I-2) Sales
65,000 $ 290,000
24,000
2,400
500,000 Cost of goods sold
(I-3) Cost of goods sold Inventory (E) Capital stock Retained earnings, beginning (1) Investment in Simali (1) $92,600 = $95,000 – $2,400 from elimination (I-1).
© Cambridge Business Publishers, 2023 6-50
500,000
3,400 3,400
5,000 92,600 97,600
Advanced Accounting, 5th Edition
(R) Identifiable intangibles Goodwill Plant assets, net Investment in Simali
160,000 290,000 80,000 370,000
(O) Plant assets Operating expenses Goodwill 17.
5,000 55,000 60,000
Calculation of investment and noncontrolling interest balances, comprehensive eliminating entries, intercompany merchandise transactions LO 2, 4 On January 1, 2023, Perfect Footgear acquired 60 percent of the voting stock of Shine Sports for $900,000 in cash. The fair value of the noncontrolling interest was $500,000. Shine’s book value was $600,000. Date-of-acquisition revaluation information for Shine’s net assets is as follows: • •
Plant assets, with a remaining life of 10 years, straight-line, were overvalued by $300,000. Identifiable intangible assets, previously unrecorded, with an 8-year life, straightline, are valued at $480,000.
It is now December 31, 2025, three years later. Goodwill from this acquisition is not impaired. Shine’s January 1, 2025 equity accounts are as follows: Capital stock……………………………………………………………………………….. Retained earnings, beginning………………………………………………………. Accumulated other comprehensive income, beginning………………… Total……………………………………………………………………………………………..
$ $
100,000 750,000 50,000 900,000
Shine reported income of $100,000 and other comprehensive income of $10,000 for 2025. Perfect sells merchandise to Shine at a 25% markup on cost. In 2025, Perfect sold merchandise priced at $500,000 to Shine. Shine’s beginning inventory included $75,000 in merchandise purchased from Perfect, and its ending inventory included $62,500 in merchandise purchased from Perfect. Perfect uses the complete equity method to account for its investment in Shine on its own books. Required a. Calculate total goodwill at the date of acquisition, and its allocation to the controlling and noncontrolling interest. b. Prepare a schedule calculating equity in net income for 2025, appearing on Perfect’s books, and the noncontrolling interest in net income for 2025, appearing on the consolidated income statement. c. Prepare a schedule calculating the December 31, 2025, balance for Investment in Shine, appearing on Perfect’s books, and the balance for the noncontrolling interest, appearing on the consolidated balance sheet at December 31, 2025. d. Prepare the eliminating entries needed to consolidate the trial balances of Perfect and Shine at December 31, 2025. Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-51
ANS: a. Acquisition cost Noncontrolling interest Total fair value Book value Plant asset revaluation ID intangibles Fair value of net assets Goodwill
$ 900,000 500,000 1,400,000 $ 600,000 (300,000) 480,000 780,000 $ 620,000
Goodwill to controlling interest = $900,000 – (60% x $780,000) = $432,000 Goodwill to noncontrolling interest = $620,000 - $432,000 = $188,000 b. Reported NI Revaluation write-offs: Plant assets ($300,000/10) ID intangibles ($480,000/8) Intercompany transactions: Down beginning inventory $75,000 – ($75,000/1.25) Down ending inventory $62,500 – ($62,500/1.25)
Equity in NI $ 60,000
NCI in NI $ 40,000
18,000 (36,000)
12,000 (24,000)
15,000 (12,500) $ 44,500
_____ $ 28,000
Investment $ 900,000
NCI $ 500,000
180,000
120,000
36,000 (72,000)
24,000 (48,000)
(15,000) 1,029,000 44,500 6,000 $1,079,500
_____ 596,000 28,000 4,000 $ 628,000
c. Date of acquisition value Change in equity to beginning of 2025 ($900,000 - $600,000) Revaluation write-offs to beginning of 2025: Plant assets ($300,000/10) x 2 ID intangibles ($480,000/8) x 2 Intercompany transactions: Downstream unconfirmed EI profit for 2024 $75,000 – ($75,000/1.25) Balance, December 31, 2024 Equity in NI/NCI in NI for 2025 Equity in OCI/NCI in OCI for 2025 Balance, December 31, 2025
© Cambridge Business Publishers, 2023 6-52
Advanced Accounting, 5th Edition
d.
(C) Equity in net income of Shine Equity in OCI of Shine Investment in Shine
44,500 6,000
(I-1) Investment in Shine Cost of goods sold
15,000
(I-2) Sales
50,500
15,000
500,000 Cost of goods sold
(I-3) Cost of goods sold Inventory (E) Capital stock Retained earnings, beginning AOCI, beginning Investment in Shine NCI in Shine
500,000
12,500 12,500
100,000 750,000 50,000 540,000 360,000
(R) Identifiable intangibles Goodwill Plant assets, net Investment in Shine (1) NCI in Shine (2) (1) 60% x ($360,000 - $240,000) + $432,000 = $504,000 (2) 40% x ($360,000 - $240,000) + $188,000 = $236,000
360,000 620,000 240,000 504,000 236,000
(O) Plant assets Operating expense Identifiable intangibles (N) NCI in NI NCI in OCI NCI in Shine
Test Bank, Chapter 6
30,000 30,000 60,000
28,000 4,000 32,000
© Cambridge Business Publishers, 2023 6-53
18.
Topic: Equity in net income and noncontrolling interest in net income calculation, consolidation eliminating entries, intercompany merchandise transactions LO 2, 4 Petersen owns 75% of Seavoss, acquired several years ago at a price equal to book value. Petersen and Seavoss sell merchandise to each other. For 2025, unconfirmed profits in inventories are as follows:
Petersen Seavoss
Beginning Inventory $25,000 5,000
Ending Inventory $40,000 4,000
Total upstream sales in 2025 were $150,000; downstream sales were $700,000. Seavoss' reported income for 2025 was $100,000. Required a. Prepare the necessary consolidation working paper eliminations for 2025. b. Calculate Petersen's equity in net income for 2025 and the noncontrolling interest in net income for 2025. ANS: a. Sales revenue
850,000 Cost of goods sold
850,000
Cost of goods sold
44,000 Inventory
44,000
Retained earnings, beg. Investment in Seavoss
25,000 5,000 Cost of goods sold
30,000
b.
Seavoss’ reported net income Downstream BI profit confirmed Downstream EI profit unconfirmed Upstream BI profit confirmed Upstream EI profit unconfirmed Total
© Cambridge Business Publishers, 2023 6-54
Equity in Net Income $ 75,000 5,000 (4,000) 18,750 (30,000) $ 64,750
Noncontrolling Interest in Net Income $ 25,000 --6,250 (10,000) $ 21,250
Advanced Accounting, 5th Edition
19.
Topic: Calculation of equity in net income, noncontrolling interest in net income, consolidated income, intercompany merchandise sales LO 2, 4 A parent owns 90% of the voting stock of its subsidiary, and uses the complete equity method to account for its investment in the subsidiary on its own books. The following information relates to results for 2025: Parent’s net income from its own operations Subsidiary’s net income from its own operations Revaluation write-off of previously unreported identifiable intangible assets Confirmed profit in subsidiary’s beginning inventory Unconfirmed profit in subsidiary’s ending inventory Confirmed profit in parent’s beginning inventory Unconfirmed profit in parent’s ending inventory
$ 40,000 10,000 500 400 460 150 200
Required a. Prepare a schedule calculating equity in net income of subsidiary, reported on the parent’s books, and noncontrolling interest in net income of subsidiary, reported on the consolidated income statement for 2025. b. Prepare a schedule calculating consolidated net income and consolidated net income to the controlling interest for 2025. ANS: a. Equity in NI $ 9,000 (450) 400 (460) 135 (180) $ 8,445
Subsidiary reported net income Revaluation write-off Confirmed profit, downstream BI Unconfirmed profit, downstream EI Confirmed profit, upstream BI Unconfirmed profit, upstream EI
NCI in NI $ 1,000 (50) --15 (20) $ 945
b. Parent’s net income from its own operations Subsidiary’s net income from its own operations Revaluation write-off Confirmed profit, downstream BI Unconfirmed profit, downstream EI Confirmed profit, upstream BI Unconfirmed profit, upstream EI Consolidated net income Noncontrolling interest in consolidated net income Consolidated net income to the controlling interest
$ 40,000 10,000 (500) 400 (460) 150 (200) 49,390 (945) $ 48,445
Note: $48,445 = $40,000 + $8,445.
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-55
20.
Topic: Consolidation eliminating entries, intercompany depreciable asset transactions LO 5 The following information relates to equipment sales between a parent and its subsidiary. •
At the beginning of 2024, the parent sold equipment with a 10-year remaining life and a book value of $80,000 to the subsidiary for $100,000. The subsidiary still holds the equipment at the end of 2025.
•
At the beginning of 2024, the subsidiary sold equipment with a 5-year remaining life and a book value of $50,000 to its parent for $80,000. The parent still holds the equipment at the end of 2025.
Required a. Prepare the eliminating entries (I) for the 2025 consolidation working paper for the above intercompany transactions. Use a net book value account for the equipment (do not separate out the original cost and accumulated depreciation accounts). b. Now assume that in each case, the equipment was sold to an outside company at the end of 2025. Repeat the requirements of part a. c. Now assume that in each case, the equipment was sold to an outside company at the beginning of 2025. Repeat the requirements of part a. ANS: a. Investment in subsidiary
18,000
Equipment, net $20,000 – ($20,000/10 x 1) = $18,000 Equipment, net
18,000
2,000 Depreciation expense
2,000
$20,000/10 = $2,000 Retained earnings, beg.
24,000
Equipment, net $30,000 – ($30,000/5 x 1) = $24,000 Equipment, net
24,000
6,000 Depreciation expense
6,000
$30,000/5 = $6,000 b. Investment in subsidiary
18,000 Depreciation expense Gain on sale
Retained earnings, beg.
24,000 Depreciation expense Gain on sale
© Cambridge Business Publishers, 2023 6-56
2,000 16,000
6,000 18,000
Advanced Accounting, 5th Edition
c. Investment in subsidiary
18,000 Gain on sale
Retained earnings, beg.
18,000 24,000
Gain on sale 21.
24,000
Topic: Consolidation eliminating entries, intercompany depreciable asset transactions LO 5 The following information relates to equipment sales between a parent and its subsidiary. 1. At the beginning of 2023, the parent sold equipment with a 5-year remaining life and a book value of $100,000 to the subsidiary for $70,000. The subsidiary sold the equipment to an outside company at the beginning of 2025, for $110,000. 2. At the beginning of 2023, the subsidiary sold equipment with a 20-year remaining life to its parent at a gain of $40,000. At the end of 2025, the parent sold the equipment to an outside company at a gain of $50,000. 3. At the beginning of 2023, the parent sold equipment with a 4-year remaining life at a loss of $20,000 to the subsidiary. The subsidiary sold the equipment at a gain of $2,000 at the beginning of 2024. 4. At the beginning of 2020, the subsidiary sold equipment with a 4-year remaining life to its parent at a gain of $7,000. The parent still holds the equipment at the end of 2025. 5. At the beginning of 2023, the parent sold equipment with a 25-year remaining life to its subsidiary at a gain of $75,000. The parent still holds the equipment at the end of 2025. Required Prepare the eliminating entries (I) for the 2025 consolidation working paper for the above intercompany transactions. Use a net book value account for the equipment (do not separate out the original cost and accumulated depreciation accounts). ANS: 1. Gain on sale of equipment
18,000
Investment in subsidiary $30,000 – ($30,000/5 x 2) = $18,000 2. Retained earnings, beg. Depreciation expense Gain on sale of building $40,000 – ($40,000/20 x 2) = $36,000 $40,000/20 = $2,000 5. Investment in subsidiary Equipment, net $75,000 – ($75,000/25 x 2) = $69,000 Equipment, net
18,000
36,000 2,000 34,000
69,000 69,000
3,000 Depreciation expense
3,000
$75,000/25 = $3,000 Note: Items 3. and 4. do not require eliminating entries. In 3., the equipment was sold last year, and in 4., the equipment has been completely depreciated. Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-57
22.
Topic: Consolidation eliminating entries, depreciable asset transactions LO 5 On January 2, 2024, Potash Company sold equipment to its wholly owned subsidiary, Solten Company, for $450,000. The equipment cost $500,000 when acquired by Potash on January 2, 2020 (four years prior to the transfer to Solten). Depreciation has been taken on a straight-line basis based on a useful life of ten years (no salvage value). The straight-line method will continue over the equipment's remaining life. Required Prepare the working paper eliminating entries (I) needed in consolidation at December 31, 2024, and at December 31, 2025, relating to the equipment transfer. Assume Solten still holds the equipment. ANS: At the date of transfer, Potash reports the equipment at a cost of $500,000 and accumulated depreciation of ($500,000/10) x 4 = $200,000, for a net book value of $300,000. Potash reports a gain on transfer of $450,000 - $300,000 = $150,000. Overstatement of depreciation each year is $150,000/6 = $25,000. Eliminating entries on 12/31/24: Gain on sale of equipment
150,000 Equipment
150,000
Accumulated depreciation
25,000 Depreciation expense
25,000
Equipment
200,000 Accumulated depreciation
200,000
Eliminating entries on 12/31/25: Investment in Solten Accumulated depreciation
125,000 25,000 Equipment
150,000
Accumulated depreciation
25,000 Depreciation expense
25,000
Equipment
200,000 Accumulated depreciation
© Cambridge Business Publishers, 2023 6-58
200,000
Advanced Accounting, 5th Edition
23.
Topic: Consolidation eliminating entries, various intercompany transactions LO 3, 4, 5 Pacific Industries consolidates its subsidiary, Salmon Enterprises. It is the end of 2025, and you have the following information on 2025 intercompany transactions between Pacific and Salmon: •
Salmon sold land to Pacific in a previous year at a gain of $25,000. Pacific still owns the land.
•
Intercompany profit in Pacific’s beginning inventory, purchased from Salmon, is $15,000. Intercompany profit in Pacific’s ending inventory, purchased from Salmon, is $12,000. Total sales from Salmon to Pacific, at the price charged to Pacific, were $150,000.
•
Pacific sold equipment with original cost of $600,000 and a book value of $500,000 to Salmon at the beginning of 2020 and charged Salmon $900,000. The equipment had a remaining life of 8 years at the time of transfer. Salmon still holds the equipment.
Required Prepare eliminating entries (I) required to consolidate the trial balances of Pacific and Salmon at the end of 2025. ANS: Retained earnings, beg.
25,000 Land
25,000
Retained earnings, beg.
15,000 Cost of goods sold
15,000
Cost of goods sold
12,000 Inventory
12,000
Sales revenue
150,000 Cost of goods sold
150,000
Investment in subsidiary Accumulated depreciation
150,000 250,000
Equipment $400,000 – ($400,000/8 x 5) = $150,000
400,000
Equipment
100,000 Accumulated depreciation
100,000
$600,000 - $500,000 = $100,000 Accumulated depreciation
50,000 Depreciation expense
50,000
$400,000/8 = $50,000
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-59
24.
Topic: Equity in net income and noncontrolling interest in net income calculation, eliminating entries, various intercompany transactions LO 2, 3, 4, 5 Pentamedia acquired 80% of SAS’s voting stock on January 1, 2021. The excess of the fair value of SAS over its book value was attributed entirely to goodwill, of which 85% is attributed to Pentamedia and 15% is attributed to the noncontrolling interest in SAS. It is now December 31, 2025, and consolidation working papers are prepared. Following is information on intercompany transactions: SAS sold merchandise with a sales value of $40,000 to Pentamedia during 2025. SAS sells its merchandise at a markup of 15% on cost. There is $3,450 sales value of inventory purchased from SAS in Pentamedia's beginning inventory; the sales value of inventory purchased from SAS and remaining in Pentamedia 's ending inventory is $5,750. Pentamedia sold depreciable property to SAS on January 1, 2023 for $10,000. Pentamedia's cost at that time was $20,000, and accumulated depreciation of $5,000 had been recorded. The property had a remaining life at the date of sale of ten years, straight-line. SAS sold the property to an outside company on January 1, 2025 (two years after SAS acquired it from Pentamedia) for $7,000. SAS sold land to Pentamedia in 2025 for $1,000; SAS reported a $200 gain on the sale. Pentamedia still holds the land. SAS reported net income of $12,000 for 2025. Goodwill impairment for 2025 is $5,000. Required a. Present the 2025 consolidation eliminating entries (I) related to the intercompany transactions described above, in journal entry form. b. Calculate Pentamedia 's equity in net income of SAS for 2025, and the noncontrolling interest in consolidated net income for 2025. ANS: a. Sales revenue
40,000 Cost of goods sold
Retained earnings, beg.
40,000 450
Cost of goods sold
450
$3,450 – ($3,450/1.15) = $450 Cost of goods sold
750 Inventory
750
$5,750 – ($5,750/1.15) = $750 Loss on sale of property
4,000
Investment in SAS 4,000 Remaining unconfirmed loss on intercompany sale = $5,000 - (2 x $5,000/10) = $4,000
© Cambridge Business Publishers, 2023 6-60
Advanced Accounting, 5th Edition
Gain on land sale
200 Land
200
b.
SAS’s reported net income Goodwill impairment Confirmed profit on beginning inventory, upstream Unconfirmed profit on ending inventory, upstream Confirmed loss on downstream property sale Unrealized gain on upstream land sale Total 25.
Equity in Net Income $ 9,600 (4,250)
Noncontrolling Interest in Net Income $ 2,400 (750)
360
90
(600)
(150)
(4,000) (160) $ 950
(40) $ 1,550
Topic: Consolidation eliminating entries, various intercompany transactions LO 3, 4, 5 Pesto Company consolidates its subsidiary, Salsa. Information on intercompany transactions for 2025 is as follows: 1. 2.
3.
During 2022, Salsa sold Pesto land for $600. The land had originally cost Salsa $200. The land is still held by Pesto. Salsa sells merchandise to Pesto on a regular basis, at a markup of 20% over cost. In 2025, Salsa sold merchandise to Pesto at a price of $25,000. Pesto’s beginning inventory for 2025 contained $1,320 in merchandise purchased from Salsa; Pesto’s ending inventory contains $1,500 in merchandise purchased from Salsa. At the beginning of 2023, Pesto sold Salsa equipment for $40,000. The equipment had been carried on Pesto’s books at a cost of $50,000 and accumulated depreciation of $35,000. As of the date of sale, the equipment had a 10-year remaining life, straight-line. Salsa still holds the equipment.
Required Prepare, in journal entry form, the required eliminating entries for the three intercompany transactions, for the December 31, 2025 consolidation working paper. ANS: Retained earnings, beginning
400 Land
Sales
400 25,000
Cost of goods sold Cost of goods sold
25,000 250
Inventory Retained earnings, beginning
220 Cost of goods sold
Test Bank, Chapter 6
250
220 © Cambridge Business Publishers, 2023 6-61
Investment in Salsa Accumulated depreciation
20,000 5,000 Equipment
25,000
Equipment
35,000 Accumulated depreciation
Accumulated depreciation
35,000 2,500
Depreciation expense 26.
2,500
Topic: Calculation of equity in net income, noncontrolling interest in net income, consolidation eliminating entries, various intercompany transactions LO 2, 3, 4, 5 A parent owns 90% of the voting stock of its subsidiary. You are consolidating the trial balances of the parent and its subsidiary at December 31, 2025. The subsidiary reports net income of $100,000 for 2025. Following is information on unconfirmed intercompany profits related to land, merchandise, and depreciable asset transfers:
Land Inventory Equipment
January 1, 2025 $ 10,000 30,000 112,500
December 31, 2025 $ 10,000 25,000 97,500
The parent sold the land to the subsidiary in 2024, and the subsidiary still holds the land. The subsidiary sells inventory to its parent; total sales between the parent and subsidiary were $800,000, valued at the price charged to the parent. The parent sold the equipment (remaining life 10 years, straight-line) to the subsidiary at a gain of $150,000 on June 30, 2022. The subsidiary still holds the equipment. On its own books, the parent reports its investment in the subsidiary using the complete equity method. There are no revaluation write-offs for 2025. Required a. Calculate equity in net income for 2025, reported on the parent’s books, and the 2025 noncontrolling interest in consolidated net income, reported on the 2025 consolidated income statement. b. Prepare the eliminating entries (I) to consolidate the trial balances of the parent and subsidiary at December 31, 2025. ANS: a. Reported net income Confirmed profit, upstream beginning inventory Unconfirmed profit, upstream ending inventory Confirmed profit, downstream equipment Equity in net income
© Cambridge Business Publishers, 2023 6-62
Total $ 100,000 30,000 (25,000) 15,000 $ 120,000
Equity in NI $ 90,000 27,000 (22,500) 15,000 $ 109,500
NCI in NI $ 10,000 3,000 (2,500) -$ 10,500
Advanced Accounting, 5th Edition
b.
Consolidation eliminating entries: Investment in subsidiary
10,000 Land
10,000
Sales revenue
800,000 Cost of goods sold
Retained earnings, beg.
800,000 30,000
Cost of goods sold Cost of goods sold
30,000 25,000
Inventory
25,000
Investment in subsidiary
112,500 Equipment, net
Equipment, net
112,500 15,000
Depreciation expense 27.
15,000
Equity method and comprehensive eliminating entries, various intercompany transactions LO 1, 2, 3, 4, 5 On January 1, 2024, Pickering Company acquired all of Silverline Corporation’s voting common stock for $800,000 in cash. Silverline’s equity accounts at the time of acquisition were capital stock of $50,000 and retained earnings of $150,000. The $600,000 excess of acquisition cost over book value of Silverline was attributed entirely to goodwill. Silverline reported net income of $42,000 and $65,000 in 2024 and 2025, respectively, and declared no dividends. Pickering reports its investment using the complete equity method. There is no goodwill impairment in 2024, but goodwill is impaired by $40,000 in 2025. Information on intercompany transactions follows: • •
• •
On March 5, 2024, Silverline sold land to Pickering for $100,000; the land originally cost $85,000. Pickering continues to hold the land. During 2025, Pickering recorded intercompany merchandise sales of $350,000 to Silverline, reflecting a markup of 25 percent on cost. Silverline’s beginning inventory included $25,000 of merchandise purchased from Pickering. Silverline’s ending inventory included $11,250 of merchandise purchased from Pickering. On January 1, 2025, Silverline sold machinery to Pickering for $35,000 and recorded a gain of $4,000. The machinery is being depreciated over its remaining life of four years, straight-line. Pickering billed Silverline $25,000 for services during 2025. Costs incurred in supplying these services amounted to $19,000. On December 31, 2025, the unpaid portion of these intercompany services amounted to $2,000.
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-63
Required a. Prepare a schedule to compute Pickering’s equity in net income of Silverline for 2025. b. Calculate the investment in Silverline balance reported by Pickering on December 31, 2025. c. Prepare working paper eliminations (C), (I), (E), (R) and (O) to consolidate the December 31, 2025 trial balances of Pickering and Silverline. ANS: a. Silverline’s net income Goodwill impairment loss Plus intercompany profits in Silverline’s beginning inventory (= $25,000 – ($25,000/1.25)) Less intercompany profits in Suro’s ending inventory (= $11,250 – ($11,250/1.25)) Less unconfirmed gain on intercompany sale of machinery (= $4,000 – ($4,000/4)) Equity in net income
$65,000 (40,000)
January 1, 2024 investment Equity in net income for 2024: Reported net income Less unconfirmed gain on intercompany land sale Less intercompany profits in Silverline’s ending inventory (= $25,000 – ($25,000/1.25))
$800,000
5,000 (2,250) (3,000) $24,750
b.
$ 42,000 (15,000) (5,000) 22,000 $822,000 24,750 $846,750
December 21, 2024 investment Equity in net income for 2025 December 31, 2025 investment c. Consolidation working paper eliminations: (C) Equity in net income of Silverline Investment in Silverline
24,750
(I-1) Retained earnings, beginning Land
15,000
(I-2) Sales
24,750
15,000
350,000 Cost of goods sold
(I-3) Investment in Silverline Cost of goods sold © Cambridge Business Publishers, 2023 6-64
350,000
5,000 5,000 Advanced Accounting, 5th Edition
(I-4) Cost of goods sold Inventory
2,250
(I-5) Gain on sale of machinery Machinery, net
4,000
(I-6) Machinery, net Depreciation expense
1,000
(I-7) Service revenue Service expense
25,000
(I-8) Accounts payable Accounts receivable
2,000
2,250
4,000
1,000
25,000
2,000
(E) Capital stock Retained earnings, beginning (1) Investment in Silverline (1) $177,000 = $150,000 + $42,000 – $15,000 from elimination (I-1).
50,000 177,000 227,000
(R) Goodwill Investment in Silverline (O) Impairment loss Goodwill
Test Bank, Chapter 6
600,000 600,000
40,000 40,000
© Cambridge Business Publishers, 2023 6-65
28.
Topic: Consolidation working paper, intercompany merchandise transactions LO 2, 4 On January 1, 2023, Petra Company acquired all of Seward Company’s voting stock for $90,000 in cash. Seward’s book value at January 1, 2023 was $8,000. Some of Seward’s identifiable assets at the date of purchase had fair values that were different from reported values, as follows: Fair Value – Book Value $10,000 35,000
Property & equipment, net (10 years, straight-line) Identifiable intangibles (5 years, straight-line)
It is now December 31, 2024 (2 years later). There has been no goodwill impairment. Seward’s beginning inventory balance for 2024 includes a markup of $1,500 for merchandise purchased from Petra. Seward’s ending inventory balance for 2024 includes a markup of $500 for merchandise purchased from Seward. Total 2024 retail sales from Petra to Seward are $25,000. Petra uses the complete equity method to account for its investment. December 31, 2024 trial balances for Petra and Seward appear in the consolidation working paper below. Required a. Calculate total goodwill for this acquisition. b. Calculate equity in net income for 2024, reported on Petra’s books. c. Fill in the eliminating entries to consolidate the trial balances of the two companies at December 31, 2024, using the consolidation working paper provided. Clearly label your entries(C), (I), (E), (R), and (O).
Current assets Plant & equipment, net Intangibles Investment in Seward
Petra Dr (Cr) $ 28,000 569,500 -93,500
Seward Dr (Cr) $ 15,000 213,000 -–
Goodwill Liabilities Capital stock Retained earnings, beg. Sales revenue Equity in NI of Seward Cost of goods sold
-(620,000) (8,000) (30,000) (900,000) (3,000) 450,000
-(200,000) (2,000) (16,000) (240,000) -150,000
Operating expenses Total
420,000 $ 0
80,000 $ 0
© Cambridge Business Publishers, 2023 6-66
Dr
Cr
Consol Dr (Cr)
Advanced Accounting, 5th Edition
ANS: a.
Acquisition cost Book value Revaluations: Property & equipment Identifiable intangibles Fair value of identifiable net assets Goodwill
$90,000
$ 8,000 10,000 35,000
53,000 $37,000
b. Seward’s reported net income Revaluation write-offs: Property & equipment Identifiable intangibles Intercompany transactions: Beginning inventory profit Ending inventory profit Equity in net income
$ 10,000 (1,000) (7,000) 1,500 (500) $ 3,000
c. Current assets Plant & equipment, net Intangibles Investment in Seward
Petra Dr (Cr) $ 28,000 569,500 -93,500
Seward Dr (Cr) $ 15,000 213,000 -–
Goodwill Liabilities Capital stock Retained earnings, beg. Sales revenue Equity in NI of Seward Cost of goods sold
– (620,000) (8,000) (30,000) (900,000) (3,000) 450,000
– (200,000) (2,000) (16,000) (240,000) – 150,000
(R) 37,000
Operating exp. Total
420,000 $ 0
$
80,000 0
(O) 8,000 $130,000
Test Bank, Chapter 6
Dr (R) 9,000 (R) 28,000 (I) 1,500
(E) 2,000 (E) 16,000 (I) 25,000 (C) 3,000 (I) 500
Cr 500 (I) 1,000(O) 7,000 (O) 3,000 (C) 18,000 (E) 74,000 (R)
25,000 (I) 1,500 (I) _______ $130,000
Consol Dr (Cr) $ 42,500 790,500 21,000 -37,000 (820,000) (8,000) (30,000) (1,115,000) -574,000
$
508,000 0
© Cambridge Business Publishers, 2023 6-67
29.
Topic: Consolidation working paper, noncontrolling interest, intercompany merchandise transactions LO 2, 4 On January 1, 2020, Precision Company acquired 75% of Shure Company’s voting stock for $192,000 in cash. Shure’s book value at January 1, 2020 was $128,000, and the fair value of the 25% noncontrolling interest was $56,000. The excess of the fair value of Shure over its book value was attributed entirely to goodwill. It is now December 31, 2024 (5 years later). Cumulative goodwill impairment to the beginning of 2024 is $3,200. Goodwill impairment for 2024 is $2,000. Shure sells merchandise to Precision at a markup of 30% on cost. Precision’s beginning inventory for 2024 contains $18,200 in merchandise purchased from Shure. Precision’s ending inventory contains $20,800 in merchandise purchased from Shure. Total 2024 retail sales from Shure to Precision are $96,000. Precision uses the complete equity method to account for its investment on its own books. December 31, 2024 trial balances for Precision and Shure appear in the consolidation working paper below. Required a. Compute acquisition-date goodwill and its allocation to the parent and to the noncontrolling interest. b. Calculate equity in net income for 2024, appearing on Precision’s books, and the noncontrolling interest in net income for 2024, appearing on the consolidated income statement. c. Fill in the eliminating entries to consolidate the trial balances of the two companies at December 31, 2024, using the consolidation working paper below. Clearly label your entries (C), (I), (E), (R), (O), and (N).
Current assets P&E, net Intangibles Investment in Shure
Precision Dr (Cr) $ 56,000 426,510 160,000 204,640
Shure Dr (Cr) $ 32,000 307,200 16,000 –
Goodwill Liabilities Capital stock Retained earnings, beg.
– (608,000) (128,000) (96,000)
– (200,000) (86,400) (60,800)
Noncontrolling interest Sales revenue Equity in NI of Shure Cost of goods sold
(640,000) (3,950) 400,000
(224,000) – 104,000
Operating expenses NCI in net income Total
228,800 _____ $ 0
112,000 _____ $ 0
© Cambridge Business Publishers, 2023 6-68
Dr
Cr
Consol Dr (Cr)
Advanced Accounting, 5th Edition
ANS: a.
Acquisition cost Noncontrolling interest fair value Total fair value Book value Goodwill
$192,000 56,000 248,000 128,000 $120,000
Goodwill to the controlling interest: $192,000 – (75% x $128,000) = $96,000 (80%) Goodwill to the noncontrolling interest: $120,000 - $96,000 = $24,000 (20%) b.
Shure’s reported net income Revaluation write-offs: Goodwill (80:20) Intercompany adjustments: Upstream beg. inv. Upstream end. inv.
Equity in Net Income $ 6,000
Noncontrolling Interest in Net Income $ 2,000
(1,600)
(400)
3,150 (3,600) $ 3,950
1,050 (1,200) $ 1,450
c. Current assets P&E, net Intangibles Investment in Shure
Precision Dr (Cr) $ 56,000 426,510 160,000 204,640
Shure Dr (Cr) $ 32,000 307,200 16,000 –
Goodwill Liabilities Capital stock Retained earnings, beg.
– (608,000) (128,000) (96,000)
– (200,000) (86,400) (60,800)
Dr
(R) 116,800
3,950 (C) 107,250 (E) 93,440 (R) 2,000 (O)
(E) 86,400 (I-1) 4,200 (E) 56,600
Noncontrolling interest
35,750 (E) 23,360 (R) 1,450 (N)
Sales revenue Equity in NI of Shure Cost of goods sold
(640,000) (3,950) 400,000
(224,000) – 104,000
(I-3) 96,000 (C) 3,950 (I-2) 4,800
Operating expenses NCI in net income Total
228,800 _______ $ 0
112,000 _______ $ 0
(O) 2,000 (N) 1,450 $372,200
Test Bank, Chapter 6
Cr 4,800 (I-2)
4,200 (I-1) 96,000 (I-3) _____ $372,200
Consol Dr (Cr) $ 83,200 733,710 176,000 – 114,800 (808,000) (128,000) (96,000) (60,560) (768,000) – 408,600 342,800 1,450 $ 0
© Cambridge Business Publishers, 2023 6-69
30.
Topic: Consolidation working paper, consolidated financial statements, intercompany merchandise and depreciable asset transactions LO 2, 4, 5 Porter Company acquired all of the voting stock of Seward Company on January 1, 2022 for $60,000. Seward Company’s book value at the date of acquisition totaled $8,000. Seward had previously unrecorded identifiable intangibles with a total fair value of $20,000 (5-year life, straight-line), and all of Seward’s other identifiable net assets had book values that approximated fair value at the date of acquisition. There is no goodwill impairment. It is now December 31, 2024 (three years since the date of acquisition). The December 31, 2024 preclosing trial balances of both companies appear on the consolidation working paper below. Porter uses the complete equity method to account for its investment in Seward on its own books. Information on intercompany transactions is as follows: 1. Seward sells merchandise to Porter at a markup of 20% on cost. Porter’s inventory at January 1, 2024 contains $960 in merchandise purchased from Seward. Porter’s inventory at December 31, 2024 contains $1,200 in merchandise purchased from Seward. Total sales from Seward to Porter during 2024 were $30,000. 2. Porter sold plant assets to Seward at a gain of $1,000 on January 1, 2023 (two years ago). Remaining life of the plant assets at the date of sale to Seward was 10 years, straight-line. Required a. Calculate the total goodwill arising from this acquisition. b. Present a schedule computing Porter’s equity in net income of Seward for 2024. c. Fill in the working paper below to consolidate the December 31, 2024 trial balances of Porter and Seward. Clearly label your eliminating entries (C), (I), (E), (R), and (O). d. Present the consolidated financial statements for 2024, in good form.
Current assets Plant assets, net Investment in Seward
Porter Dr (Cr) $ 16,000 124,000 63,600
Seward Dr (Cr) $ 6,600 72,000 --
Identifiable intangibles Goodwill Liabilities Capital stock Retained earnings, beg. AOCI, beg. Sales revenue Equity in NI of Seward Equity in OCI of Seward Cost of goods sold
--(159,240) (14,000) (30,000) (2,000) (95,000) (560) (100) 62,000
--(54,000) (2,000) (16,500) (1,500) (35,000) --23,000
35,000
7,500
Operating expenses OC(I)L Total
© Cambridge Business Publishers, 2023 6-70
$
300 0
$
Dr
Cr
Consol Dr (Cr)
(100) 0
Advanced Accounting, 5th Edition
ANS: a.
Acquisition cost Book value Acquisition cost over book value Revaluation: identifiable intangibles Goodwill
$60,000 8,000 52,000 20,000 $32,000
b. Seward’s reported net income Revaluation write-off: Intangibles $20,000/5 BI profit confirmed EI profit unconfirmed Profit on intercompany plant assets sale confirmed Equity in NI c.
$ 4,500 (4,000) 160 (200) 100 $ 560
Consolidation working paper, December 31, 2024 Current assets Plant assets, net Investment in Seward
Porter Dr (Cr) $ 16,000 124,000 63,600
Seward Dr (Cr) $ 6,600 72,000 --
Identifiable intangibles Goodwill Liabilities Capital stock Retained earnings, beg.
--(159,240) (14,000) (30,000)
--(54,000) (2,000) (16,500)
AOCI, Jan. 1 Sales revenue Equity in NI of Seward Equity in OCI of Seward Cost of goods sold
(2,000) (95,000) (560) (100) 62,000
(1,500) (35,000) --23,000
Operating expenses OCL(I) Total
35,000 300 $ 0
7,500 (100) $ 0
Test Bank, Chapter 6
Dr (I-5) (I-4)
100 900
(R) 12,000 (R) 32,000 (E) 2,000 (I-3) 160 (E) 16,340 (E) 1,500 (I-2) 30,000 (C) 560 (C) 100 (I-1) 200 (O)
4,000 ______ $99,860
Cr 200 (I-1) 900 (I-4) 660 (C) 19,840 (E) 44,000 (R) 4,000 (O)
30,000 (I-2) 160 (I-3) 100 (I-5) _______ $99,860
Consol Dr (Cr) $ 22,400 195,200 -8,000 32,000 (213,240) (14,000) (30,000) (2,000) (100,000) --55,040 46,400 200 $ 0
© Cambridge Business Publishers, 2023 6-71
d. Consolidated Statement of Income and Comprehensive Income for 2024 Sales revenue $ 100,000 Cost of goods sold (55,040) Gross margin 44,960 Operating expenses (46,400) Net loss (1,440) Other comprehensive loss (200) Comprehensive loss $ (1,640) Consolidated Balance Sheet at December 31, 2024 Assets Current assets $ 22,400 Plant assets, net 195,200 Intangible assets 8,000 Goodwill 32,000 Total assets $ 257,600 Liabilities & Equity Total liabilities
$ 213,240
Capital stock Retained earnings (1) Accumulated other comprehensive income (2) Total equity Total liabilities & equity
14,000 28,560 1,800 44,360 $ 257,600
(1) $30,000 - $1,440 = $28,560 (2) $2,000 - $200 = $1,800
© Cambridge Business Publishers, 2023 6-72
Advanced Accounting, 5th Edition
31.
Topic: Consolidation working paper, consolidated financial statements, various intercompany transactions LO 2, 4, 5 Pacer Corporation acquired 80% of Slicker Company’s voting stock for $36,250 on January 1, 2023. The reported equity of Slicker on January 1, 2023 was $3,000 in common stock and $9,000 in retained earnings. The fair value of the noncontrolling interest was $7,750. Slicker’s assets and liabilities were reported at amounts approximating fair value at the date of acquisition, except for these items:
Land Buildings Identifiable intangibles
Book Value $2,000 8,000 0
Fair Value $8,000 3,000 10,000
The buildings had a remaining useful life of 10 years, and the identifiable intangibles are amortized over 5 years as of the date of acquisition, both straight-line. Goodwill is impaired by $2,000 in 2023 and is unimpaired in 2024. The land, buildings, and identifiable intangibles are still held by Slicker. It is now December 31, 2024 (two years since the acquisition took place). The trial balances of Pacer and Slicker are in the consolidation working paper below. Information on intercompany transactions is as follows: 1. On January 2, 2023, Pacer sold Slicker equipment for a price of $800. The equipment had a book value of $300 at the time of sale, and a remaining life of 5 years, straight-line. 2. Slicker sells merchandise to Pacer on a continuing basis, at a markup of 20% on cost. Pacer’s 2024 beginning inventory contains $90 in goods purchased from Slicker. Pacer’s 2024 ending inventory contains $120 in goods purchased from Slicker. Total intercompany sales for 2024 were $3,000. Pacer uses the complete equity method to account for its investment in Slicker on its own books. Required a. Calculate the total goodwill arising from this acquisition and its allocation to the parent and to the noncontrolling interest. b. Present a schedule computing Pacer’s equity in net income of Slicker for 2024, reported on its own books, and the noncontrolling interest in net income for 2024, reported on the consolidated income statement. c. Complete the working paper below to consolidate the December 31, 2024 trial balances of Pacer and Slicker. Clearly label your eliminating entries (C), (I), (E), (R), (O), and (N). d. Present the consolidated financial statements for 2024, in good form.
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-73
Consolidation working paper, December 31, 2024 Pacer Dr (Cr) $ 16,000 8,000 145,200
Slicker Dr (Cr) $ 6,000 7,000 25,000
35,834
--
--(9,000) (158,338) (10,000) (20,000) (2,000) --
--(5,000) (16,000) (3,000) (11,000) ---
800
--
Revenues Equity in NI of Slicker Cost of goods sold
(155,000) (1,296) 118,000
(40,000) -28,000
Operating expenses OCI NCI in NI of Slicker Total
32,000 (200) -$ 0
9,000 --$ 0
Current assets Land Buildings & equipment (net) Investment in Slicker Identifiable intangibles Goodwill Current liabilities Long-term debt Capital stock Retained earnings, beg. AOCI, beg. NCI in Slicker Dividends
ANS: a.
Acquisition cost Fair value of noncontrolling interest Total fair value Book value Revaluations: Land Buildings Identifiable intangibles Fair value of identifiable net assets Goodwill
Dr
$12,000 6,000 (5,000) 10,000
Cr
Consol Dr (Cr)
$ 36,250 7,750 44,000
23,000 $ 21,000
Goodwill attributed to parent: $36,250 – (80% x $23,000) = $17,850 (85%) Goodwill attributed to noncontrolling interest: $21,000 - $17,850 = $3,150 (15%)
© Cambridge Business Publishers, 2023 6-74
Advanced Accounting, 5th Edition
b. Slicker’s reported net income Revaluation write-offs: Buildings $5,000/10 Intangibles $10,000/5 Upstream BI profit confirmed Upstream EI profit unconfirmed Downstream equipment gain confirmed
c.
Equity in NI $ 2,400
NCI in NI $ 600
400 (1,600) 12 (16) 100 $ 1,296
100 (400) 3 (4) ___-$ 299
Consolidation working paper, December 31, 2024 Pacer Dr (Cr) $ 16,000 8,000 145,200
Slicker Dr (Cr) $ 6,000 7,000 25,000
35,834
--
--(9,000) (158,338) (10,000) (20,000)
--(5,000) (16,000) (3,000) (11,000)
(2,000) --
---
Dividends Revenues Equity in NI of Slicker Cost of goods sold
800 (155,000) (1,296) 118,000
-(40,000) -28,000
Operating expenses OCI NCI in NI Total
32,000 (200) -$ 0
9,000 --$ 0
Current assets Land Buildings & equipment (net) Investment in Slicker Identifiable intangibles Goodwill Current liabilities Long-term debt Capital stock Retained earnings, beg. AOCI, beg. NCI in Slicker
Test Bank, Chapter 6
Dr (R) 6,000 (I-5) 100 (O) 500 (I-4) 400 (R) 8,000 (R) 19,000
Cr 20 (I-2) 400 (I-4) 4,500 (R) 1,296 (C) 11,188 (E) 23,750 (R) 2,000 (O)
(E) 3,000 (I-1) 15 (E) 10,985 2,797 4,750 299 (I-3) 3,000 (C) 1,296 (I-2) 20 (O) 1,500 (N) 299 $54,115
(E) (R) (N)
3,000 (I-3) 15 (I-1) 100 (I-5) ______ $54,115
Consol Dr (Cr) $ 21,980 21,000 165,900 -6,000 19,000 (14,000) (174,338) (10,000) (20,000) (2,000) (7,846) 800 (192,000) -143,005 42,400 (200) 299 $ 0
© Cambridge Business Publishers, 2023 6-75
d. Consolidated Statement of Income and Comprehensive Income for 2024 Revenues Cost of goods sold Gross margin Operating expenses Consolidated net income Noncontrolling interest in net income Net income to controlling interest
$ 192,000 (143,005) 48,995 (42,400) 6,595 (299) 6,296
Consolidated net income Other comprehensive income Consolidated comprehensive income Noncontrolling interest in comprehensive income Comprehensive income to controlling interest
$
6,595 200 6,795 (299) 6,496
Consolidated Balance Sheet at December 31, 2024
(1) (2)
Assets Current assets Land Buildings & equipment, net Intangible assets Goodwill Total assets
$ 21,980 21,000 165,900 6,000 19,000 $ 233,880
Liabilities & Equity Current liabilities Long-term debt Total liabilities
$ 14,000 174,338 188,338
Capital stock Retained earnings (1) Accumulated other comprehensive income (2) Shareholders’ equity—Controlling interest Noncontrolling interest Total equity Total liabilities & equity
10,000 25,496 2,200 37,696 7,846 45,542 $ 233,880
$20,000 + $6,296 – $800 = $25,496 $2,000 + $200 = $2,200
© Cambridge Business Publishers, 2023 6-76
Advanced Accounting, 5th Edition
32.
Topic: Consolidation working paper, noncontrolling interest, intercompany merchandise transactions LO 2, 4 On January 2, 2021, Palace Shoes acquired 60% of the voting stock of Sage Footwear. Palace uses the complete equity method to account for its investment in Sage on its own books. Sage’s assets and liabilities were reported at amounts approximating fair value, except for previously unreported indefinite life identifiable intangible assets valued at $8,000. These intangible assets were impaired by $1,000 to the beginning of 2024 and are not impaired in 2024. The goodwill recognized for this acquisition was $50,000, split between Palace and the noncontrolling interest in a 70:30 ratio. There has been no goodwill impairment to the beginning of 2024, but testing reveals goodwill impairment of $2,000 in 2024. Sage sells merchandise to Palace (upstream sales) on a regular basis. Information on sales activities is as follows: Sales price of merchandise sold to Palace in 2024 Markup in Palace’s 2024 beginning inventory Markup in Palace’s 2024 ending inventory
$20,000 300 500
It is now December 31, 2024, four years since the acquisition. The December 31, 2024 trial balances of Palace and Sage appear in the consolidation working paper below.
Current assets Plant assets, net Intangibles Investment in Sage
Palace Dr (Cr) $ 10,000 300,000 – 49,680
Sage Dr (Cr) $ 3,000 85,000 – –
Goodwill Liabilities Capital stock Retained earnings, beg.
– (153,365) (80,000) (120,000)
– (67,700) (7,500) (8,000)
AOCI, beg. Noncontrolling interest
(1,000) –
(200) –
Sales revenue Equity in NI of Sage Cost of goods sold
(125,000) (1,180) 80,000
(50,000) – 30,000
Operating expenses OCI Equity in Sage’s OCI NCI in net income NCI in OCI Total
41,000 (75) (60) – – $ 0
15,500 (100) – – – $ 0
Test Bank, Chapter 6
Dr
Cr
Consol Dr (Cr)
© Cambridge Business Publishers, 2023 6-77
Required a. Calculate 2024 equity in net income, reported on Palace’s books, and noncontrolling interest in net income, reported on the consolidated income statement. b. Fill in the working paper as necessary to consolidate the December 31, 2024 trial balances of Palace and Sage. Label the eliminating entries (C),( I), (E), (R), (O), (N). ANS: a. Equity in Net Income $ 2,700 (1,400) 180 (300) $ 1,180
Sage’s reported net income GW impairment $2,000, 70:30 Up BI profit confirmed $300, 60:40 Up EI profit unconfirmed $500, 60:40
Noncontrolling Interest in Net Income $ 1,800 (600) 120 (200) $ 1,120
b. Current assets Plant assets, net Intangibles Investment in Sage
Palace Dr (Cr) $ 10,000 300,000 – 49,680
Sage Dr (Cr) $ 3,000 85,000 – –
Goodwill Liabilities Capital stock Retained earnings, beg.
– (153,365) (80,000) (120,000)
– (67,700) (7,500) (8,000)
AOCI, beg. Noncontrolling interest
(1,000) –
(200) –
Sales revenue Equity in NI of Sage Cost of goods sold
(125,000) (1,180) 80,000
(50,000) – 30,000
(I-2) 20,000 (C) 1,180 (I-3) 500
Operating expenses OCI Equity in Sage’s OCI NCI in net income NCI in OCI Total
41,000 (75) (60) – – $ 0
15,500 (100) – – – $ 0
(O)
2,000
(C) (N) (N)
60 1,120 40 $97,600
© Cambridge Business Publishers, 2023 6-78
Dr
(R)
Cr 500 (I-3)
7,000
(R) 50,000
1,240 (C) 9,240 (E) 39,200 (R) 2,000 (O)
(E) 7,500 (I-1) 300 (E) 7,700 (E) 200 6,160 (E) 17,800 (R) 1,160 (N)
300 (I-1) 20,000 (I-2)
______ $97,600
Consol Dr (Cr) $ 12,500 385,000 7,000 -48,000 (221,065) (80,000) (120,000) (1,000) (25,120) (155,000) -90,200 58,500 (175) -1,120 40 $ 0
Advanced Accounting, 5th Edition
33.
Topic: Consolidation working paper, noncontrolling interest, consolidated financial statements, intercompany merchandise transactions LO 2, 4 Palmer, a U.S. company, acquired 90% of Scala’s voting stock for $32,600 in cash on January 1, 2022, when Scala’s book value was $5,000. The fair value of the noncontrolling interest at the date of acquisition was $2,400. At the date of acquisition, all of Scala’s assets and liabilities were reported at fair value, except for the following items:
Plant assets Identifiable intangible: Leaseholds
Date of Acquisition Book Value $ 20,000 0
Date of Acquisition Fair Value $ 8,000 20,000
Remaining Life at Date of Acquisition 12 years 5 years
The identifiable intangible meets the GAAP requirements for capitalization. All depreciation and amortization is straight-line. There is no impairment of plant & equipment or identifiable intangibles. Total impairment of goodwill arising from this acquisition as of the beginning of 2024 is $3,000. Goodwill impairment for 2024 is $1,000. Scala sells inventory to Palmer at a markup of 20% on cost. Here is information on inventory transactions for 2024. Note that the amounts are the balances reported on the books, so you need to calculate markups as appropriate.
Inventory on Palmer’s books, acquired from Scala, as of January 1, 2024 Inventory on Palmer’s books, acquired from Scala, as of December 31, 2024 Total sales from Scala to Palmer, at price charged to Palmer, for 2024
Balance $ 2,880 3,600 25,000
You are preparing the consolidated financial statements for 2024 (third year since acquisition). The trial balances of Palmer and Scala at December 31, 2024, collected from the books of Palmer and Scala, are in the consolidation working paper below. Palmer uses the complete equity method to report its investment on its own books. Required a. Calculate the total goodwill originally recognized for this acquisition, and its allocation to the controlling interest and the noncontrolling interest. b. Calculate 2024 equity in net income of Scala, reported on Palmer’s books, and noncontrolling interest in consolidated net income, reported on the 2024 consolidated income statement. c. Fill in the working paper to consolidate the December 31, 2024 trial balances of Palmer and Scala. Clearly label eliminating entries (C), (I), (E), (R), (O), and (N). d. Prepare the consolidated income statement and consolidated statement of comprehensive income for 2024, and the consolidated balance sheet for December 31, 2024.
Test Bank, Chapter 6
© Cambridge Business Publishers, 2023 6-79
Current assets Plant assets, net ID intangibles Investment in Scala
Palmer Dr (Cr) $ 26,000 140,000 -29,430
Scala Dr (Cr) $ 7,000 90,000 ---
Goodwill Total liabilities Capital stock Retained earnings, beg
-(147,843) (5,000) (25,000)
-(81,700) (2,000) (8,000)
AOCI, beg. NCI in equity
(850) --
500 --
Sales revenue
(150,000)
(50,000)
OC(I) L Equity in NI of Scala Equity in OCL of Scala Cost of goods sold
(275) (1,642) 180 120,000
200 --30,000
Operating expenses
15,000
14,000
--
--
NCI in NI NCI in OCI Total
ANS: a.
$
-0
Acquisition cost Fair value of NCI Total fair value Book value Revaluations: Plant assets Identifiable intangible Fair value of identifiable net assets Goodwill
$
Dr
Cr
Consol. Dr (Cr)
-0
$ 5,000 (12,000) 20,000
$ 32,600 2,400 35,000
13,000 $ 22,000
Controlling interest’s share: $32,600 – (90% x $13,000) = $20,900 (95%) Noncontrolling interest’s share: $22,000 - $20,900 = $1,100 (5%)
© Cambridge Business Publishers, 2023 6-80
Advanced Accounting, 5th Edition
b. Equity in NI $ 5,400
Scala’s reported net income for 2024 Revaluation write-offs for 2024: Plant assets depreciation correction Leaseholds amortization Goodwill impairment loss (95:5) Intercompany transaction adjustments: Upstream beg. inventory confirmed profit Upstream end. inventory unconfirmed profit
Noncontrolling Interest in NI $ 600
900 (3,600) (950)
100 (400) (50)
432 (540) $ 1,642
48 (60) 238
$
c. Current assets Plant assets (net) ID intangibles Investment in Scala
Palmer Dr (Cr) $ 26,000 140,000 -29,430
Scala Dr (Cr) $ 7,000 90,000 ---
Goodwill Total liabilities Capital stock Retained earnings, beg
-(147,843) (5,000) (25,000)
-(81,700) (2,000) (8,000)
AOCI, beg. NCI in equity
(850) --
500 --
Sales revenue
(150,000)
(50,000)
OC(I) L Equity in NI of Scala Equity in OCL of Scala Cost of goods sold
(275) (1,642) 180 120,000
200 --30,000
Operating expenses
15,000
14,000
--
--
NCI in NI NCI in OCL Total
Test Bank, Chapter 6
$
-0
$
-0
Dr (O) 1,000 (R) 12,000
(R) 19,000
Cr 600 (I-3) 10,000 (R) 4,000 (O) 1,462 (C) 8,118 (E) 19,850 (R) 1,000 (O)
(E) 2,000 (I-2) 480 (E) 7,520
Consol. Dr (Cr) $ 32,400 221,000 8,000 -18,000 (229,543) (5,000) (25,000)
500 (E) 902 (E) 1,150 (R) 218 (N) (I-1) 25,000
(C)
1,642
(I-3)
600
(850) (2,270) (175,000)
180 (C) 25,000 (I-1) 480 (I-2)
(75) --125,120
(O) 4,000 (N)
33,000
238
______ $73,480
238 20 (N) $73,480
$
© Cambridge Business Publishers, 2023 6-81
(20) 0
d. Consolidated Income Statement for 2024 Sales revenue Cost of goods sold Gross margin Operating expenses Consolidated net income Consolidated net income to the noncontrolling interest Consolidated net income to the controlling interest
$ 175,000 (125,120) 49,880 (33,000) 16,880 (238) $ 16,642
Consolidated Statement of Comprehensive Income for 2024 Consolidated net income $ 16,880 Other comprehensive income 75 Consolidated comprehensive income 16,955 Consolidated comprehensive income to the noncontrolling interest (1) (218) Consolidated comprehensive income to the controlling interest $ 16,737 (1) $238 - $20 = $218
Consolidated Balance Sheet at December 31, 2024 Assets Current assets Plant assets, net Identifiable intangible assets Goodwill Total assets Liabilities & Equity Liabilities Capital stock Retained earnings (2) Accumulated other comprehensive income (3) Shareholders’ equity—Controlling interest Noncontrolling interest Total equity Total liabilities & equity
$ 32,400 221,000 8,000 18,000 $ 279,400
229,543 5,000 41,642 945 47,587 2,270 49,857 $ 279,400
(2) $25,000 + $16,642 = $41,642 (3) $850 + $75 + $20 = $945
© Cambridge Business Publishers, 2023 6-82
Advanced Accounting, 5th Edition
TEST BANK CHAPTER 7 Consolidating Foreign Currency Financial Statements MULTIPLE CHOICE 1.
2.
3.
Topic: Translation and remeasurement terminology LO 1 The currency in which an international subsidiary conducts most of its transactions is its a. b. c. d.
Local currency. Functional currency. Currency of the country where the subsidiary is incorporated. Reporting currency.
ANS:
b
Topic: Translation and remeasurement terminology LO 1 The currency in which an international subsidiary’s parent presents its consolidated financial statements is its a. b. c. d.
Local currency. Functional currency. Currency of the country where the parent is incorporated. Reporting currency.
ANS:
d
Topic: Remeasurement goal LO 1 During the process of converting a subsidiary’s account balances to its U.S. parent’s reporting currency, the purpose of remeasurement is to a.
c. d.
produce the same result as if the subsidiary’s transactions had been recorded in its local currency. produce the same result as if the subsidiary’s transactions had been recorded in U.S. dollars. maintain the financial picture of the subsidiary as presented in its local currency. report gains and losses resulting from rate changes in other comprehensive income.
ANS:
b
b.
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-1
4.
Topic: Translation goal LO 1 During the process of converting a subsidiary’s account balances to the U.S. parent’s reporting currency, the purpose of translation is to a.
c. d.
produce the same result as if the subsidiary’s transactions had been recorded in its local currency. produce the same result as if the subsidiary’s transactions had been recorded in U.S. dollars. maintain the financial picture of the subsidiary as presented in its functional currency. report gains and losses resulting from rate changes in income.
ANS:
c
b.
5.
6.
7.
Topic: Translation and remeasurement procedures LO 1 A U.S. parent has a subsidiary in Canada. Its account balances are measured in Canadian dollars. If the parent’s reporting currency is the U.S. dollar and the subsidiary’s functional currency is the Canadian dollar, conversion of the subsidiary’s accounts to U.S. dollars involves a. b. c. d.
Both remeasurement and translation Only translation Only remeasurement No conversion to another currency
ANS:
b
Topic: Translation and remeasurement procedures LO 1 A U.S. parent has a subsidiary in Canada. Its account balances are measured in Canadian dollars. If the parent’s functional currency is the U.S. dollar and the subsidiary’s functional currency is the U.S. dollar, conversion of the subsidiary’s accounts to U.S. dollars involves a. b. c. d.
Both remeasurement and translation Only translation Only remeasurement No conversion to another currency
ANS:
c
Topic: Translation and remeasurement procedures LO 1 A U.S. parent has a subsidiary in Canada. Its account balances are measured in Canadian dollars. If the parent’s functional currency is the U.S. dollar and the subsidiary’s functional currency is the euro, conversion of the subsidiary’s accounts to U.S. dollars involves a. b. c. d.
Both remeasurement and translation Only translation Only remeasurement No conversion to another currency
©Cambridge Business Publishers, 2023 7-2
Advanced Accounting, 5th Edition
ANS: 8.
9.
10.
11.
a
Topic: Translation and remeasurement objectives LO 1 U.S. GAAP for converting an international subsidiary’s accounts to the parent’s currency follow from what basic objective? a. b. c. d.
Minimize the impact on consolidated net income Minimize the complexity of consolidation eliminating entries required Preserve the subsidiary’s financial performance as depicted in the parent’s currency Preserve the subsidiary’s financial performance as depicted in its functional currency
ANS:
d
Topic: Translation and remeasurement procedures LO 1 An international subsidiary reports its accounts in euros. In the consolidation process, its accounts are remeasured into Singapore dollars and then translated into U.S. dollars. What is the most accurate observation? a. b. c. d.
The parent company ‘s functional currency is the euro. The subsidiary’s local currency is the same as its functional currency. The subsidiary conducts most of its business in euros. The subsidiary conducts most of its business in Singapore dollars.
ANS:
d
Topic: Translation and remeasurement procedures LO 1 An international subsidiary reports its accounts in Singapore dollars. In the consolidation process, its accounts are remeasured into euros and then translated into U.S. dollars. What is the most accurate observation? a. b. c. d.
The parent company ‘s functional currency is the euro. The subsidiary’s local currency is the same as its functional currency. The subsidiary conducts most of its business in euros. The subsidiary conducts most of its business in Singapore dollars.
ANS:
c
Topic: Translation and remeasurement choices LO 1 A U.S. parent has a subsidiary located in Brazil. In which situation will the U.S. parent remeasure the account balances of the subsidiary to U.S. dollars? a. b. c. d.
The subsidiary’s customers are mostly located in Brazil. The subsidiary’s accounts are maintained in U.S. dollars. The parent’s customers are mostly located in Brazil. The level of inflation in Brazil is extremely high.
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-3
ANS: 12.
13.
14.
15.
d
Topic: Translation and remeasurement choices LO 1 A U.S. parent has a subsidiary located in Brazil. In which situation will the U.S. parent translate the account balances of the subsidiary to U.S. dollars? a. b. c. d.
The subsidiary’s customers are mostly located in Brazil. The subsidiary’s accounts are maintained in U.S. dollars. The parent’s customers are mostly located in Brazil. The level of inflation in Brazil is extremely high.
ANS:
a
Topic: Exposure to translation gains and losses LO 1 When translating the subsidiary’s accounts to the parent’s reporting currency, which of the following transactions, made by the subsidiary, affect its exposure to translation gains and losses? a. b. c. d.
Recording sales revenue Borrowing money from the bank Purchasing inventory on account Purchasing plant assets on account
ANS:
a
Topic: Exposure to remeasurement gains and losses LO 1 When remeasuring a subsidiary’s accounts to its functional currency, which of the following transactions or adjustments, made by the subsidiary, affect its exposure to remeasurement gains and losses? a. b. c. d.
Borrowing money from the bank Recording customer payments of accounts receivable Purchasing inventory on account Recording depreciation expense
ANS:
c
Topic: Exposure to translation gains and losses LO 1 When translating a subsidiary’s accounts to the parent’s reporting currency, which of the following transactions, made by the subsidiary, affect its exposure to translation gains and losses? a. b. c. d.
Refinancing existing notes payable by issuing more notes payable Purchasing equipment for cash. Accruing salaries owed at year-end Paying cash to invest in equity securities
ANS:
c
©Cambridge Business Publishers, 2023 7-4
Advanced Accounting, 5th Edition
16.
17.
18.
19.
Topic: Exposure to remeasurement gains and losses LO 1 When remeasuring a subsidiary’s accounts to its functional currency, which of the following transactions or adjustments, made by the subsidiary, affect its exposure to remeasurement gains and losses? a. b. c. d.
Purchasing equipment on account Recording goodwill impairment Receiving cash in payment of customer accounts receivable Recording the cost of goods sold
ANS:
a
Topic: Exposure to translation and remeasurement gains and losses LO 1 A U.S. parent owns a subsidiary in the U.K. The subsidiary invests in equity securities for cash. The investment is categorized as having no significant influence. How does this transaction affect the subsidiary’s exposure to remeasurement or translation gains or losses? a. b. c. d.
Remeasurement exposure changes Translation exposure changes Neither remeasurement nor translation exposure changes Both remeasurement and translation exposures change
ANS:
c
Topic: Exposure to translation and remeasurement gains and losses LO 1 A U.S. parent owns a subsidiary in the U.K. The subsidiary pays cash to invest in the equity securities of another company, categorizing the investment as an equity method investment. How does this transaction affect the subsidiary’s exposure to remeasurement or translation gains or losses? a. b. c. d.
Remeasurement exposure changes Translation exposure changes Neither remeasurement nor translation exposure changes Both remeasurement and translation exposures change
ANS:
a
Topic: Exposure to translation and remeasurement gains and losses LO 1 A U.S. parent owns a subsidiary in France, and the subsidiary’s accounts are maintained in euros, its functional currency. During the year, the euro has weakened against the U.S. dollar (U.S.$/€ rate has declined). Which one of the subsidiary’s transactions below increases the amount of translation losses reported when the subsidiary’s accounts are translated to U.S. dollars? a. b. c. d.
Inventory purchases Salaries expense Other comprehensive loss Sales revenue
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-5
ANS: 20.
21.
22.
23.
d
Topic: Exposure to translation and remeasurement gains and losses LO 1 A U.S. parent owns a subsidiary in France, the subsidiary’s accounts are maintained in euros, and its functional currency is the U.S. dollar. During the year, the euro has weakened against the U.S. dollar (U.S.$/€ rate has declined). Which one of the subsidiary’s transactions below increases the amount of remeasurement losses reported when the subsidiary’s accounts are translated to U.S. dollars? a. b. c. d.
Inventory purchases on account Depreciation expense Purchases of equity securities for cash Sales revenue
ANS:
d
Topic: Remeasurement procedures LO 1 In the consolidated financial statements, remeasurement gains and losses for an international subsidiary are reported: a. b. c. d.
In consolidated income As a direct adjustment to consolidated retained earnings In consolidated other comprehensive income As an adjustment to the investment in subsidiary account
ANS:
a
Topic: Translation procedures LO 1 In the consolidated financial statements, translation gains and losses for an international subsidiary are reported: a. b. c. d.
In consolidated income As a direct adjustment to consolidated retained earnings In consolidated other comprehensive income As an adjustment to the investment in subsidiary account
ANS:
c
Topic: Translation and remeasurement procedures LO 1 Which account is always converted using the same rate, whether a subsidiary’s accounts are remeasured or translated? a. b. c. d.
Equity method investments Inventory Cost of goods sold Loans payable
©Cambridge Business Publishers, 2023 7-6
Advanced Accounting, 5th Edition
ANS: 24.
Topic: Translation and remeasurement procedures LO 1 A U.S. parent has a wholly-owned subsidiary in Iceland. The subsidiary’s accounts are reported in Icelandic kronor. Under what circumstances will the U.S. parent translate the subsidiary’s accounts from Icelandic kronor to U.S. dollars? a.
25.
b. c. d.
The subsidiary’s functional currency is a currency other than the Icelandic krona or the U.S. dollar. The subsidiary’s functional currency is the U.S. dollar. Iceland has a highly inflationary economy. The subsidiary’s functional currency is the Icelandic krona.
ANS:
d
Topic: Translation and remeasurement procedures LO 1 A U.S. parent has a wholly-owned subsidiary in Iceland. The subsidiary’s accounts are reported in Icelandic kronor. Under what circumstances will the U.S. parent remeasure the subsidiary’s accounts from Icelandic kronor to U.S. dollars? a.
26.
d
b. c. d.
The subsidiary’s functional currency is a currency other than the Icelandic krona or the U.S. dollar. The subsidiary’s functional currency is the U.S. dollar. Iceland does not have a highly inflationary economy. The subsidiary’s functional currency is the Icelandic krona.
ANS:
b
Topic: Translation and remeasurement procedures LO 1 A U.S. company has several international subsidiaries, which it converts to U.S. dollars by remeasuring the subsidiaries’ local currency accounts directly into U.S. dollars. Which statement is true concerning these subsidiaries? a. b. c. d.
Their local currency is their functional currency. Their functional currency is the U.S. dollar. Their functional currency is different from the parent’s functional currency. The subsidiaries report their accounts in U.S. dollars.
ANS:
b
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-7
27.
Topic: Choice of conversion method, hyperinflation LO 1 How should a U.S. company with an international subsidiary decide whether to use remeasurement or translation to convert the accounts of the subsidiary to U.S. dollars? a. b. c. d. ANS:
28.
a
Topic: Remeasurement and translation procedures LO 1 You are a U.S. parent and you have a subsidiary in Singapore. The subsidiary’s functional currency is the Singapore dollar and it maintains its accounts in Singapore dollars. When you consolidate the subsidiary, you will: a. b. c. d. ANS:
29.
Translate if the subsidiary does most of its business in its own country but remeasure if the country has hyperinflation. Remeasure if the subsidiary does most of its business in U.S. dollars, but translate if the country has hyperinflation. Translate if the subsidiary does most of its business in U.S. dollars, but remeasure if the country has hyperinflation. Remeasure if the subsidiary does most of its business in its own country but translate if the country has hyperinflation.
Remeasure the subsidiary’s trial balance into U.S. dollars and then do the consolidation eliminating entries Translate the subsidiary’s trial balance into U.S. dollars and then do the consolidation eliminating entries Put the subsidiary’s trial balance, in Singapore dollars, on the working paper and add the Singapore dollar balances to the parent’s U.S. dollar balances Translate the subsidiary’s trial balance into Singapore dollars, then remeasure it into U.S. dollars, and then do the consolidation eliminating entries b
Topic: Remeasurement and translation procedures LO 1 You are a U.S. parent and you have a subsidiary in Singapore. The subsidiary’s functional currency is the U.S. dollar and it maintains its accounts in Singapore dollars. When you consolidate the subsidiary, you will: a. b. c. d. ANS:
Remeasure the subsidiary’s trial balance into U.S. dollars and then do the consolidation eliminating entries Translate the subsidiary’s trial balance into U.S. dollars and then do the consolidation eliminating entries Put the subsidiary’s trial balance, in Singapore dollars, on the working paper and add the Singapore dollar balances to the parent’s U.S. dollar balances Translate the subsidiary’s trial balance into Singapore dollars, then remeasure it into U.S. dollars, and then do the consolidation eliminating entries a
©Cambridge Business Publishers, 2023 7-8
Advanced Accounting, 5th Edition
30.
Topic: Remeasurement and translation procedures LO 1 You are a U.S. parent and you have a subsidiary in Singapore. The subsidiary’s functional currency is the euro, and it maintains its accounts in Singapore dollars. When you consolidate the subsidiary, you will: a. b. c. d. ANS:
Remeasure the subsidiary’s trial balance into U.S. dollars and then do the consolidation eliminating entries. Translate the subsidiary’s trial balance into U.S. dollars and then do the consolidation eliminating entries. Remeasure the subsidiary’s trial balance into euros and then translate it into U.S. dollars, and then do the consolidation eliminating entries. Translate the subsidiary’s trial balance into euros, then remeasure it into U.S. dollars, and then do the consolidation eliminating entries. c
Use the following information to answer Questions 31 – 34. A U.S. company acquired a Philippine subsidiary at the beginning of the year. At the date of acquisition, the subsidiary reported plant assets of 800,000 pesos. During the year, it acquired plant assets of 300,000 pesos and reported depreciation expense of 100,000 pesos, of which 40,000 pesos related to plant assets acquired during the year. The subsidiary reported inventory 150,000 pesos at the date of acquisition, made inventory purchases of 450,000 pesos evenly during the year, and had 120,000 pesos of inventory on hand at the end of the year. The U.S.$/peso exchange rate was $0.02 on the acquisition date, $0.028 when the new plant assets were acquired, $0.029 when the ending inventory was purchased, $0.03 at the end of the year, and the average rate for the year was $0.025. 31.
32.
Topic: Remeasured operating expenses LO 1 What is the subsidiary’s remeasured depreciation expense for the year? a. b. c. d.
$2,000 $2,200 $2,320 $2,500
ANS:
c (60,000 x $0.02) + (40,000 x $0.028) = $2,320
Topic: Translated operating expenses LO 1 What is the subsidiary’s translated depreciation expense for the year? a. b. c. d.
$2,000 $2,200 $2,320 $2,500
ANS:
d 100,000 x $0.025 = $2,500
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-9
33.
34.
Topic: Remeasured cost of goods sold LO1 What is the subsidiary’s remeasured cost of goods sold for the year? a. b. c. d.
$ 9,600 $10,770 $11,250 $12,000
ANS:
b (150,000 x $0.02) + (450,000 x $0.025) – (120,000 x $0.029) = $10,770
Topic: Translated cost of goods sold LO1 What is the subsidiary’s translated cost of goods sold for the year? a. b. c. d.
$ 9,600 $10,770 $11,250 $12,000
ANS:
d 480,000 x $0.025 = $12,000
Use the following information to answer Questions 35 and 36. At the beginning of the current year, a U.S. company established a subsidiary in Canada, having the following balance sheet (shown in Canadian dollars): Cash Fixed assets, net Total
C$ 100,000 300,000 C$ 400,000
Liabilities Capital stock Total
C$ 200,000 200,000 C$ 400,000
At the end of the year, the subsidiary reported the following trial balance: Cash Fixed assets, net Liabilities Capital stock Sales Depreciation expense Out-of-pocket expenses Exchange rates are as follows:
Beginning of year Average for year End of year
©Cambridge Business Publishers, 2023 7-10
Dr (Cr) C$ 150,000 250,000 (160,000) (200,000) (490,000) 50,000 400,000 C$ 0 $0.80 0.78 0.82
Advanced Accounting, 5th Edition
35.
36.
Topic: Remeasurement gain or loss LO 1 What is the gain or loss that occurs when the subsidiary’s trial balance is remeasured into U.S. dollars? a. b. c. d.
$4,400 loss $6,200 loss $1,600 gain $5,600 gain
ANS:
c Beginning exposure (C$100,000 – C$200,000) + Sales – Out-of-pocket expenses
C$(100,000) x $0.80 + C$490,000 x $0.78 - C$400,000 x $0.78
Ending exposure (C$150,000 – C$160,000) Remeasurement gain
C$(10,000) x $0.82
$ (80,000) 382,200 (312,000) (9,800) (8,200) $ 1,600
Topic: Translation gain or loss LO 1 What is the gain or loss that occurs when the subsidiary’s trial balance is translated into U.S. dollars? a. b. c. d.
$4,400 loss $6,200 loss $1,600 gain $5,600 gain
ANS:
d Beginning net assets Net income
C$200,000 x $0.80 = 40,000 x $0.78 =
Ending net assets Translation gain
C$240,000 x $0.82 =
Test Bank, Chapter 7
$ 160,000 31,200 191,200 196,800 $ 5,600
©Cambridge Business Publishers, 2023 7-11
Use the following information to answer Questions 37 – 46. A Belgium subsidiary’s beginning and ending trial balances appear below:
Cash, receivables Inventories Plant & equipment, net Liabilities Capital stock Retained earnings, beginning Sales revenue Cost of sales Out-of-pocket selling & administrative expenses Depreciation expense Total
Dr (Cr) January 1 December 31 € 1,500 € 1,200 3,000 3,500 30,000 39,000 (18,500) (27,200) (4,000) (4,000) (12,000) (12,000) -(15,000) 9,500 -4,000 -1,000 € 0 € 0
Exchange rates ($/€) are: Beginning of year Average for year End of year
$1.25 1.22 1.20
The subsidiary was acquired at the beginning of the year. Its sales, inventory purchases, and out-of-pocket selling and administrative expenses occurred evenly during the year. Equipment was purchased for €10,000 when the exchange rate was $1.23. Depreciation for the year includes €200 related to the equipment purchased during the year. The ending inventory was purchased at the end of the year, and the beginning inventory was purchased at the end of the previous year. 37.
Topic: Translation gain or loss LO 1 If the subsidiary’s functional currency is the euro, what is its exposure to translation gains and losses as of the beginning of the year? a. b. c. d.
€ 16,000 €(17,000) €(18,500) € 1,500
ANS:
d Exposure is net assets: €4,000 + €12,000 = €16,000
©Cambridge Business Publishers, 2023 7-12
Advanced Accounting, 5th Edition
38.
39.
40.
41.
Topic: Remeasurement gain or loss LO 1 If the subsidiary’s functional currency is the U.S. dollar, what is its exposure to remeasurement gains and losses at the end of the year? a. b. c. d.
€ 16,000 €(26,000) €(27,200) € 16,500
ANS:
b Exposure is cash, receivables less liabilities: €1,200 - €27,200 = €(26,000)
Topic: Expense translation LO 1 If the subsidiary’s functional currency is the euro, what is translated depreciation expense for the year? a. b. c. d.
$1,250 $1,246 $1,220 $1,200
ANS:
c €1,000 x $1.22 = $1,220
Topic: Expense translation LO 1 If the subsidiary’s functional currency is the U.S. dollar, what is remeasured depreciation expense for the year? a. b. c. d.
$1,250 $1,246 $1,220 $1,200
ANS:
b (€800 x $1.25) + (€200 x $1.23) = $1,246
Topic: Expense remeasurement LO 1 If the subsidiary’s functional currency is the U.S. dollar, what is remeasured cost of sales for the year? a. b. c. d.
$11,750 $11,590 $11,425 $10,530
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-13
ANS:
42.
43.
a
Beginning inventory + Purchases – Ending inventory Cost of sales
$ 3,750 12,200 (4,200) $ 11,750
Topic: Expense remeasurement LO 1 If the subsidiary’s functional currency is the euro, what is translated cost of sales for the year? a. b. c. d.
$11,750 $11,590 $11,425 $10,530
ANS:
b €9,500 x $1.22 = $11,590
Topic: Remeasurement gain or loss LO 1 If the subsidiary’s functional currency is the U.S. dollar, what is the remeasurement gain or loss for the year? a. b. c. d.
$ 810 loss $1,030 gain $1,130 gain $2,020 loss
ANS:
c Remeasurement gain or loss: Beginning exposure + Sales – Purchases – Out-of-pocket expenses – Equipment purchase Ending exposure Remeasurement gain
44.
€3,000 x $1.25 = €10,000 x $1.22 = €3,500 x $1.20 =
€(17,000) x $1.25 = 15,000 x $1.22 = (10,000) x $1.22 = (4,000) x $1.22 = (10,000) x $1.23 = €(26,000) x $1.20 =
$(21,250) 18,300 (12,200) (4,880) (12,300) (32,330) (31,200) $ 1,130
Topic: Translation gain or loss LO 1 If the subsidiary’s functional currency is the euro, what is the translation gain or loss for the year? a. b. c. d.
$ 810 loss $1,030 gain $1,130 gain $2,020 loss
©Cambridge Business Publishers, 2023 7-14
Advanced Accounting, 5th Edition
ANS:
a Translation gain or loss: Beginning net assets + Net income Ending net assets Translation loss
45.
46.
€16,000 x 1.25 = 500 x 1.22 = €16,500 x 1.20 =
$20,000 610 20,610 19,800 $ 810
Topic: Remeasured plant & equipment LO 1 If the subsidiary’s functional currency is the U.S. dollar, what is the remeasured plant & equipment, net balance at year-end? a. b. c. d.
$48,456 $47,580 $46,800 $48,554
ANS:
d [(€30,000 - €800) x $1.25] + [(€10,000 - €200) x $1.23] = $48,554
Topic: Translated plant & equipment LO 1 If the subsidiary’s functional currency is the euro, what is the translated plant & equipment, net balance at year-end? a. b. c. d.
$48,456 $47,580 $46,800 $48,554
ANS:
c €39,000 x $1.20 = $46,800
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-15
Use the following information to answer Questions 47 – 58. A U.S. company acquired a U.K. subsidiary at the beginning of the current year. The subsidiary’s trial balances for January 1 and December 31 are presented below, in pounds sterling.
Cash, receivables Inventories Plant & equipment, net Liabilities Capital stock Retained earnings, January 1 Sales revenue Cost of goods sold Operating expenses Total
January 1 Dr (Cr) £ 40,000 100,000 300,000 (175,000) (115,000) (150,000)
December 31 Dr (Cr) £ 45,000 90,000 335,000 (170,000) (115,000) (150,000) (800,000) 600,000 165,000 £ 0
________ £ 0
New plant & equipment of £100,000 was acquired during the year. Operating expenses include £65,000 of depreciation on plant & equipment, of which £10,000 is related to plant & equipment purchased during the year. Inventory purchases and out-of-pocket operating expenses occurred evenly during the year. Exchange rates (U.S.$/£) are as follows: January 1 Average for year Plant & equipment acquired Ending inventories purchased December 31 47.
$1.40 1.37 1.39 1.36 1.35
Topic: Remeasured cost of goods sold LO 1 Assume the subsidiary’s functional currency is the U.S. dollar. What is remeasured cost of goods sold for the year? a. b. c. d.
$790,700 $822,000 $825,900 $840,000
ANS:
c See calculations below.
©Cambridge Business Publishers, 2023 7-16
Advanced Accounting, 5th Edition
48.
49.
50.
51.
Topic: Translated cost of goods sold LO 1 Assume the subsidiary’s functional currency is the pound sterling. What is translated cost of goods sold for the year? a. b. c. d.
$790,700 $822,000 $825,900 $840,000
ANS:
b See calculations below.
Topic: Remeasured operating expenses LO 1 Assume the subsidiary’s functional currency is the U.S. dollar. What are remeasured operating expenses for the year? a. b. c. d.
$226,050 $227,350 $227,900 $228,000
ANS:
c See calculations below.
Topic: Translated operating expenses LO 1 Assume the subsidiary’s functional currency is the pound sterling. What are translated operating expenses for the year? a. b. c. d.
$226,050 $227,350 $227,900 $228,000
ANS:
a See calculations below.
Topic: Remeasured inventories LO 1 Assume that the subsidiary’s functional currency is the U.S. dollar. What are remeasured inventories at the end of the year? a. b. c. d.
$121,500 $122,400 $135,000 $136,000
ANS:
b See calculations below.nd
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-17
52.
53.
54.
55.
Topic: Translated inventories LO 1 Assume that the subsidiary’s functional currency is the pound sterling. What are translated inventories at the end of the year? a. b. c. d.
$121,500 $122,400 $135,000 $136,000
ANS:
a See calculations below.
Topic: Remeasurement gain or loss LO 1 Assume that the subsidiary’s functional currency is U.S. dollar. What is the remeasurement gain or loss for the year? a. b. c. d.
$ 8,550 gain $10,650 gain $18,560 loss $31,950 loss
ANS:
a See calculations below.
Topic: Translation gain or loss LO 1 Assume that the subsidiary’s functional currency is the pound sterling. What is the translation gain or loss for the year? a. b. c. d.
$17,900 gain $81,950 gain $13,950 loss $14,300 loss
ANS:
c See calculations below.
Topic: Remeasured net income LO 1 Assume that the subsidiary’s functional currency is the U.S. dollar. What is the subsidiary’s remeasured net income for the year? a. b. c. d.
$34,000 $42,200 $47,950 $50,750
©Cambridge Business Publishers, 2023 7-18
Advanced Accounting, 5th Edition
ANS:
56.
57.
58.
d $1,096,000 - $825,900 - $227,900 + $8,550 = $50,750 See calculations below.
Topic: Translated net income LO 1 Assume that the subsidiary’s functional currency is the pound sterling. What is the subsidiary’s translated net income for the year? a. b. c. d.
$34,000 $42,200 $47,950 $50,750
ANS:
c $1,096,000 - $822,000 - $226,050 = $47,950 See calculations below.
Topic: Remeasured retained earnings LO 1 Assume that the subsidiary’s functional currency is the U.S. dollar. What is the subsidiary’s remeasured retained earnings balance at year-end? a. b. c. d.
$250,450 $253,250 $257,950 $260,750
ANS:
d $210,000 + $50,750 = $260,750 See calculations below.
Topic: Translated retained earnings LO 1 Assume that the subsidiary’s functional currency is the pound sterling. What is the subsidiary’s translated retained earnings balance at year-end? a. b. c. d.
$250,450 $253,250 $257,950 $260,750
ANS:
c $210,000 + $47,950 = $257,950 See calculations below.
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-19
Calculations for Questions 47 – 58: Translated trial balance: Cash, receivables Inventories Plant & equipment, net Liabilities Capital stock Retained earnings, January 1 Sales revenue Cost of goods sold Operating expenses Translation loss (OCI) Totals
£ £ 45,000 90,000 335,000 (170,000) (115,000) (150,000) (800,000) 600,000 165,000 -£ 0
Rate 1.35 1.35 1.35 1.35 1.40 1.40 1.37 1.37 1.37 (1)
$ $ 60,750 121,500 452,250 (229,500) (161,000) (210,000) (1,096,000) 822,000 226,050 13,950 $ 0
(1) Translation loss calculation Beginning exposed position (£115,000 + £150,000) + Net income (£800,000 - £765,000) Ending exposed position Translation loss
£ £265,000 35,000
Rate $1.40 1.37
£300,000
1.35
$ $371,000 47,950 418,950 405,000 $ 13,950
Remeasured trial balance: Cash, receivables Inventories Plant & equipment, net Liabilities Capital stock Retained earnings, January 1 Sales revenue Cost of goods sold Operating expenses Remeasurement gain (income) Totals (2) (3) (4)
£ £ 45,000 90,000 335,000 (170,000) (115,000) (150,000) (800,000) 600,000 165,000 -£ 0
Rate 1.35 1.36 (2) 1.35 1.40 1.40 1.37 (3) (4) (5)
$ $ 60,750 122,400 468,100 (229,500) (161,000) (210,000) (1,096,000) 825,900 227,900 (8,550) $ 0
[(£300,000 - £55,000) x $1.40] + [(£100,000 - £10,000) x $1.39] = $468,100 (£100,000 x $1.40) + (£590,000 x $1.37) – (£90,000 x $1.36) = $825,900 (£100,000 x $1.37) + (£55,000 x $1.40) + (£10,000 x $1.39) = $227,900
©Cambridge Business Publishers, 2023 7-20
Advanced Accounting, 5th Edition
(5) Remeasurement gain calculation
Beginning exposed position (£40,000 - £175,000) + Sales revenue - Inventory purchases (£90,000 + £600,000 - £100,000) – Out of pocket expenses (£165,000 - £65,000) – Plant & equipment purchase Ending exposed position (£45,000 - £170,000) Remeasurement gain (income) 59.
Rate $1.40 1.37 1.37 1.37 1.39
£ (125,000)
1.35
$ $ (189,000) 1,096,000 (808,300) (137,000) (139,000) (177,300) (168,750) $ 8,550
Topic: Conversion of statement of cash flows LO 1 A U.S. parent has a subsidiary in Hong Kong. The Hong Kong dollar has strengthened against the U.S. dollar ($/HK$ rate has increased). Which statement is true concerning conversion of an international subsidiary’s statement of cash flows to its parent’s currency? a.
If the subsidiary’s functional currency is the U.S. dollar, the effect of rate changes on cash is a higher loss than if the subsidiary’s functional currency is the Hong Kong dollar. If the subsidiary’s functional currency is the Hong Kong dollar, the effect of rate changes on cash is a higher gain than if the subsidiary’s functional currency is the U.S. dollar. If the subsidiary’s functional currency is the U.S. dollar, the effect of rate changes on cash is a higher gain than if the subsidiary’s functional currency is the Hong Kong dollar. The effect of rate changes on cash is the same whether the subsidiary’s accounts are remeasured or translated.
b. c. d. ANS: 60.
£ £ (135,000) 800,000 590,000 (100,000) (100,000)
d
Topic: Conversion of statement of cash flows LO 1 A Spanish subsidiary of a U.S. parent reports the following information on its statement of cash flows: • • • • • •
Beginning cash balance, €10,000 Cash from operating activities, €450,000 Cash used for investing activities, €650,000 Cash from financing activities, €215,000 Beginning rate, €1.14; average rate, €1.16; ending rate, €1.20 Operating, investing, and financing cash flows were incurred evenly over the year.
What is the effect of exchange rate changes on cash? a. b. c. d.
$1,000 gain $1,200 gain $1,000 loss $1,200 loss
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-21
ANS:
61.
62.
Topic: Financial analysis of translated and remeasured information LO 2 Which financial ratio is always the same whether computed using local currency balances or translated balances? a. b. c. d.
Receivables turnover (credit sales/average receivables) Total assets turnover (sales/average assets) Return on assets (profit/average assets) Gross margin percentage (gross margin/sales)
ANS:
d
Topic: Interpreting translation gains and losses LO 2 A U.S. company has a subsidiary in Mexico. If the company’s statement of comprehensive income reports a loss for conversion of subsidiary accounts to U.S. dollars in other comprehensive income, the most likely explanation is that: a. b. c. d. ANS:
63.
b The change in cash is €450,000 - €650,000 + €215,000 = €15,000 (€25,000 x $1.20) – [(€10,000 x $1.14) + (€15,000 x $1.16)] = $1,200 gain
The peso has strengthened against the U.S. dollar and the subsidiary’s functional currency is the peso. The peso has weakened against the U.S. dollar and the subsidiary’s functional currency is the U.S. dollar. The peso has strengthened against the U.S. dollar and the subsidiary’s functional currency is the U.S. dollar. The peso has weakened against the U.S. dollar and the subsidiary’s functional currency is the peso. d
Topic: Interpreting translation gains and losses LO 2 A U.S. company has a subsidiary in Mexico. If the company’s income statement reports a gain for conversion of subsidiary accounts to U.S. dollars, the most likely explanation is that: a. b. c. d. ANS:
The peso has strengthened against the U.S. dollar and the subsidiary’s functional currency is the peso. The peso has weakened against the U.S. dollar and the subsidiary’s functional currency is the U.S. dollar. The peso has strengthened against the U.S. dollar and the subsidiary’s functional currency is the U.S. dollar. The peso has weakened against the U.S. dollar and the subsidiary’s functional currency is the peso. b
©Cambridge Business Publishers, 2023 7-22
Advanced Accounting, 5th Edition
64.
Topic: Analysis of translation and remeasurement gain or loss LO 2 Assume the U.S. dollar has been steadily weakening against the euro, and operating profit excludes remeasurement gains and losses. Which statement is most likely to be true concerning translation and remeasurement of the accounts of a U.S. parent’s subsidiary in Portugal? a. b. c. d. ANS:
65.
Remeasured operating profit as a percent of assets will be the same as local currency operating profit as a percent of assets. Remeasured operating expenses will be higher than translated operating expenses. Translated total assets will be higher than remeasured total assets. Remeasured operating profit as a percent of assets will be lower than translated operating profit as a percent of assets. c
Topic: Financial analysis of translated and remeasured information LO 2 The U.S. dollar has been steadily strengthening with respect to the Canadian dollar. A U.S. parent has a subsidiary in Canada. Which statement is most likely to be true concerning the subsidiary’s leverage, calculated as ending total liabilities divided by ending total assets? (Use T to represent translated leverage, R to represent remeasured leverage, and L to represent leverage calculated using local currency balances.)
66.
a. b. c. d.
R>T=L R>T>L L=T>R R>L>T
ANS:
c
Topic: Financial analysis of translated and remeasured information LO 2 The U.S. dollar has been steadily weakening with respect to the Hong Kong dollar. A U.S. parent has a Hong Kong subsidiary. The subsidiary uses FIFO. Which statement is most likely to be true concerning the subsidiary’s gross margin percentage, calculated as [(Sales revenue – Cost of goods sold)/Sales revenue]? (Use T to represent the translated gross margin percentage, R to represent the remeasured gross margin percentage, and L to represent the gross margin percentage calculated using local currency balances.) a. b. c. d.
R>T=L R>T>L L=T>R R>L>T
ANS:
a
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-23
67.
Topic: Financial analysis of translated and remeasured information LO 2 The U.S. dollar has been steadily strengthening with respect to the Singapore dollar. A U.S. parent has a Singapore subsidiary. Which statement is most likely to be true concerning the subsidiary’s operating profit (excluding remeasurement gain or loss) as a percentage of average assets? (Use T to represent the translated operating profit percentage, R to represent the remeasured operating profit percentage, and L to represent the operating profit percentage calculated using local currency balances.)
68.
69.
a. b. c. d.
R>T=L R>T>L L=T>R R>L>T
ANS:
c
Topic: Financial analysis of translated and remeasured information LO 2 The U.S. dollar has been steadily weakening with respect to the Hong Kong dollar. A U.S. parent has a Hong Kong subsidiary. The subsidiary has positive net assets and its monetary assets are less than its liabilities. The subsidiary’s functional currency is the U.S. dollar. Which statement is most likely to be true concerning the gain or loss resulting from conversion of the subsidiary’s accounts to U.S. dollars? a. b. c. d.
A gain will be reported in income. A loss will be reported in income. A gain will be reported in other comprehensive income. A loss will be reported in other comprehensive income.
ANS:
b
Topic: Financial analysis of translated and remeasured information LO 2 A U.S. company reports a remeasurement gain on its Mexican subsidiary and a translation loss on its Swiss subsidiary. Which is most likely true? a.
d.
The U.S. dollar weakened against the Mexican peso and strengthened against the Swiss franc. The U.S. dollar weakened against both the Mexican peso and the Swiss franc. The U.S. dollar strengthened against the Mexican peso and weakened against the Swiss franc. The U.S. dollar strengthened against both the Mexican peso and the Swiss franc.
ANS:
d
b. c.
©Cambridge Business Publishers, 2023 7-24
Advanced Accounting, 5th Edition
Use the following information to answer Questions 70 – 76. Parkin Industries, a U.S. company, acquired a wholly-owned subsidiary, located in Italy, at the beginning of the current year, for €200,000. The subsidiary’s functional currency is the euro. The balance sheet of the subsidiary at the date of acquisition was as follows: Assets Current assets Plant and equipment, net Total assets
€ 50,000 200,000 €250,000
Liabilities and Equity Liabilities Capital stock Retained earnings Total liabilities and equity
€ 160,000 20,000 70,000 €250,000
Appropriate revaluations of the subsidiary’s assets at the date of acquisition are as follows: • • •
Inventories are undervalued by €1,000. The subsidiary sold the inventory during the current year. Equipment is undervalued by €15,000. The equipment has a 10-year remaining life, straight-line. Identifiable indefinite life intangible assets, previously unreported, have a fair value of €40,000.
During the current year, there was no impairment of either identifiable intangible assets or goodwill. The exchange rate at the beginning of the year was $1.20/€. The average rate for the year was $1.22/€, and the rate at the end of the year was $1.25/€. 70.
71.
Topic: Consolidation of international subsidiary at date of acquisition LO 3 The excess of acquisition cost over book value for this acquisition, in U.S. dollars, is: a. b. c. d.
$110,000 $132,000 $134,200 $137,500
ANS:
b See calculations below.
Topic: Consolidation of international subsidiary at date of acquisition LO 3 The entries required to consolidate the balance sheets of Parkin Industries and its subsidiary at the date of acquisition include recognition of goodwill of: a. b. c. d.
$0 $ 64,800 $132,000 $103,200
ANS:
b See calculations below.
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-25
72.
Topic: Consolidation of international subsidiary at date of acquisition LO 3 Consolidation elimination entry (R), at the date of acquisition, includes a credit to investment in subsidiary in the amount of: a. b. c. d.
$0 $108,000 $240,000 $132,000
ANS:
d See calculations below.
Calculations for Questions 70 - 72:
Acquisition cost Book value Excess of acquisition cost over book value Revaluations: Inventories Plant and equipment Identifiable intangible assets Goodwill
€ €200,000 90,000 110,000
$/€ 1.20 1.20
$ $240,000 108,000 132,000
1,000 15,000 40,000 € 54,000
1.20 1.20 1.20 1.20
1,200 18,000 48,000 $ 64,800
Consolidation eliminating entries (E) and (R) at the date of acquisition: (E) Capital stock (€20,000 x $1.20) Retained earnings (€70,000 x $1.20)
24,000 84,000 Investment in subsidiary
(R) Current assets (€1,000 x $1.20) Plant and equipment (€15,000 x $1.20) Intangible assets (€40,000 x $1.20) Goodwill
108,000 1,200 18,000 48,000 64,800
Investment in subsidiary 73.
132,000
Topic: Consolidation of international subsidiary one year after acquisition LO 3 At the end of the year, consolidation eliminating entry (R) includes a debit to current assets in the amount of: a. b. c. d.
$0 $1,220 $1,250 $1,200
ANS:
c €1,000 x $1.25 = $1,250
©Cambridge Business Publishers, 2023 7-26
Advanced Accounting, 5th Edition
74.
75.
76.
Topic: Consolidation of international subsidiary one year after acquisition LO 3 At the end of the year, consolidation eliminating entry (O) includes a debit to depreciation expense in the amount of: a. b. c. d.
$1,830 $1,500 $1,875 $1,800
ANS:
a €1,500 x $1.22 = $1,830
Topic: Consolidation of international subsidiary one year after acquisition LO 3 At the end of the year, consolidation eliminating entry (R) has what effect on consolidated other comprehensive income? a. b. c. d.
$6,600 gain $5,500 gain No effect $4,500 loss
ANS:
b €110,000 x ($1.25 - $1.20) = $5,500 gain
Topic: Consolidation of international subsidiary one year after acquisition LO 3 At the end of the year, consolidation eliminating entry (O) has what effect on consolidated other comprehensive income? a. b. c. d.
$85 gain $125 loss No effect $75 loss
ANS:
d €2,500 x ($1.22 - $1.25) = $75 loss
Calculations for Questions 73 - 76: Eliminating entries (R) and (O) at end of first year: (R) Current assets (€1,000 x $1.25) Plant and equipment (€15,000 x $1.25) Intangible assets (€40,000 x $1.25) Goodwill (€54,000 x $1.25)
1,250 18,750 50,000 67,500 Investment in subsidiary OCI
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-27
132,000 5,500
(O) Cost of goods sold (€1,000 x $1.22) Depreciation expense (€1,500 x 1.22) OCI
1,220 1,830 75 Current assets (€1,000 x $1.25) Plant and equipment (€1,500 x $1.25)
Use the following information to answer Questions 77 - 82. Parex Corporation, a U.S. company, acquired a wholly-owned subsidiary, located in Hong Kong, at the beginning of the current year, for HK$100,000. The HK$25,000 excess paid above book value is attributed to goodwill, which is not impaired during the current year. The trial balances of the subsidiary at the beginning and end of the year are as follows (in Hong Kong dollars):
Cash, receivables Equipment, net Liabilities Capital stock Retained earnings, January 1 Sales revenue Out-of-pocket expenses Depreciation expense Total
January 1 Dr (Cr) HK$ 35,000 300,000 (260,000) (10,000) (65,000)
________ HK$ 0
December 31 Dr (Cr) HK$ 30,000 275,000 (215,000) (10,000) (65,000) (250,000) 210,000 25,000 HK$ 0
There were no purchases or sales of equipment during the year. The exchange rate was $0.14/HK$ at the date of acquisition and $0.12/HK$ at the end of the current year. The average exchange rate for the year was $0.135/HK$. Parex uses the complete equity method to account for its investment in the subsidiary on its own books. For Questions 77 – 79, assume the subsidiary’s functional currency is the Hong Kong dollar, and its accounts are translated to U.S. dollars for consolidation with the parent. 77.
Topic: Consolidation of international subsidiary one year after acquisition, translation LO 3 What is the balance for investment in subsidiary at the end of the year, as reported on Parex’s books? a. b. c. d.
$14,000 $14,300 $12,000 $16,025
ANS:
b (HK$250,000 – HK$210,000 – HK$25,000) x $0.135 = $2,025 equity in NI (HK$75,000 x $0.14) + (HK$15,000 x $0.135) – (HK$90,000 x $0.12) = $1,725 equity in OCL (HK100,000 x $0.14) + $2,025 - $1,725 = $14,300
©Cambridge Business Publishers, 2023 7-28
Advanced Accounting, 5th Edition
1,250 1,875
78.
79.
Topic: Consolidation of international subsidiary one year after acquisition, translation LO 3 At what value is goodwill reported on the consolidated balance sheet at the end of the year? a. b. c. d.
$25,000 $ 3,500 $ 3,000 $ 0
ANS:
c (HK$25,000) x $0.12 = $3,000
Topic: Consolidation of international subsidiary one year after acquisition, translation LO 3 Assume Parex had no other comprehensive income or loss for the year. What is the consolidated other comprehensive loss for the year? a. b. c. d.
$ 0 $ 500 $1,725 $2,225
ANS:
c
For Questions 80 – 82, assume the subsidiary’s functional currency is the U.S. dollar, and its accounts are remeasured to U.S. dollars for consolidation with the parent. 80.
Topic: Consolidation of international subsidiary one year after acquisition, remeasurement LO 3 What is the balance for investment in subsidiary at the end of the year, as reported on Parex’s books? a. b. c. d.
$14,000 $12,000 $19,800 $17,800
ANS:
c Gain on remeasurement of the trial balance is calculated as follows: £ Rate Beginning exposed position (HK$35,000 – HK$260,000) HK$(225,000) $0.14 + Sales revenue 250,000 0.135 - Out of pocket expenses (210,000) 0.135
$ $ (31,500) 33,750 (28,350) (26,100) Ending exposed position (HK$30,000 – HK$215,000) HK$(185,000) 0.12 (22,200) Remeasurement gain (income) $ 3,900 Remeasured subsidiary net income = [(HK$250,000 – HK$210,000) x $0.135] – (HK$25,000 x $0.14) + $3,900 = $5,800 Investment balance at end of year = $14,000 + $5,800 = $19,800
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-29
81.
82.
83.
Topic: Consolidation of international subsidiary one year after acquisition, remeasurement LO 3 At what value is goodwill reported on the consolidated balance sheet at the end of the year? a. b. c. d.
$25,000 $ 3,500 $ 3,000 $ 0
ANS:
b (HK$25,000) x $0.14 = $3,500
Topic: Consolidation of international subsidiary one year after acquisition, remeasurement LO 3 Assume Parex had no other comprehensive income or loss for the year. What is the consolidated other comprehensive loss for the year? a. b. c. d.
$ 0 $ 500 $1,725 $2,225
ANS:
a
Topic: Consolidation procedures for international subsidiaries LO 3 A U.S. company consolidates a subsidiary whose accounts are reported in euros. The subsidiary’s functional currency is the euro. During the consolidation eliminating entries, consolidated other comprehensive income changes because: a.
d.
Revaluation and subsequent write-off of the subsidiary’s assets and liabilities change its exposure to translation gains and losses. The subsidiary’s other comprehensive income is eliminated. Elimination of the investment account on the parent’s books reduces the subsidiary’s assets. The noncontrolling interest in the subsidiary must share in the subsidiary’s equity.
ANS:
a
b. c.
84.
Topic: Consolidation procedures for international subsidiaries LO 3 A U.S. company has a subsidiary in the U.K., acquired at a cost in excess of the subsidiary’s book value. The U.S. dollar has steadily strengthened with respect to the pound sterling. The subsidiary’s functional currency is the pound. Which statement is true concerning the effects of consolidation eliminations (R) and (O), recognizing beginning-of-year revaluations and write-offs for the current year? a. b. c. d.
Additional net losses will be reported in net income. Additional net losses will be reported in other comprehensive income. Additional net gains will be reported in net income. Additional net gains will be reported in other comprehensive income.
©Cambridge Business Publishers, 2023 7-30
Advanced Accounting, 5th Edition
ANS: 85.
86.
Topic: Consolidation procedures for international subsidiaries, translation LO 3 You are doing the consolidation working paper for a U.S. company and its U.K. subsidiary. The subsidiary’s functional currency is the pound sterling. The U.S. dollar has steadily weakened against the pound. When you do eliminating entries (R) and (O) to recognize and write off previously unrecorded intangible assets for the subsidiary, what is the net effect? a. b. c. d.
Gain in other comprehensive income Loss in other comprehensive income Loss in income No effect
ANS:
a U.S. dollar value of additional assets recognized has increased.
Topic: U.S. GAAP vs IFRS for hyperinflationary economies LO 4 IFRS for converting the account balances of an international subsidiary in a hyperinflationary country to the parent’s presentation currency requires: a. b. c. d. ANS:
87.
b
Remeasurement of the subsidiary’s accounts to the parent’s presentation currency Translation of the subsidiary’s accounts to the parent’s presentation currency Price-level adjustment of the subsidiary’s accounts, and then translation of the accounts to the parent’s presentation currency Price-level adjustment of the subsidiary’s accounts, and then remeasurement of the accounts to the parent’s presentation currency c
Topic: U.S. GAAP vs IFRS for hyperinflationary economies LO 4 Ukraine is designated as a highly inflationary country. A Ukrainian subsidiary of a German company owns land that it bought for 40,000 hryvnia (₴), when the €/₴ rate was €0.15, and the price level index was 100. It is now the end of the current year. In which situation below will IFRS and U.S. GAAP report the same end-of-year amount for the land, in euros? a. b. c. d.
The end of year exchange rate is €0.02, and the end of year price level index is 800. The average exchange rate for the year is €0.02, and the average price level index is 800. The end of year exchange rate is €0.025, and the end of year price level index is 600. The average exchange rate for the year is €0.025, and the average price level index is 600.
ANS:
c €0.15 x ₴40,000 = (₴40,000 x 600/100) x €0.025
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-31
88.
Topic: U.S. GAAP vs IFRS for hyperinflationary economies LO 4 A French company has a subsidiary in Argentina, which is designated as a highly inflationary country. The subsidiary’s functional currency is the Argentine peso. The subsidiary reports land on its books at cost, 25,000 pesos. The price level index was 200 when the land was purchased and is 1,200 now. The €/peso rate was €0.05 when the land was purchased and is €0.008 now. At what amount, in euros, is the land reported using U.S. GAAP and IFRS? a. b. c. d. ANS:
89.
U.S. GAAP €1,250 €1,200 €1,200 €1,200 a U.S. GAAP: IFRS:
25,000 pesos x €0.05 = €1,250 25,000 pesos x 1,200/200 x €0.008 = €1,200
Topic: U.S. GAAP vs IFRS for hyperinflationary economies LO 4 A French company has a subsidiary in Uruguay, which is designated as a highly inflationary country. The subsidiary’s functional currency is the Uruguay peso. The subsidiary reports land on its books at cost, 10,000 pesos. The price level index was 100 when the land was purchased and is 550 now. The €/peso rate was €0.15 when the land was purchased and is €0.03 now. At what amount, in euros, is the land reported using U.S. GAAP and IFRS? a. b. c. d.
U.S. GAAP €1,650 €3,000 €1,650 €1,500 ANS: d U.S. GAAP: IFRS:
90.
IFRS €1,200 € 200 €2,400 €1,250
IFRS € 1,500 € 1,650 € 3,000 € 1,650 10,000 x €0.15 = €1,500 10,000 x 550/100 x €0.03 = €1,650
Topic: U.S. GAAP vs IFRS for hyperinflationary economies LO 4 A subsidiary of a U.S. parent is in a highly inflationary country, and its functional currency is its local currency. The subsidiary purchased land when the U.S. dollar price of the local currency was $5.00, and the price level index was 100. Currently the U.S. dollar price of the local currency is $0.10, and the price level index is 5,100. Which is true regarding U.S. GAAP and IFRS computation of the U.S. dollar amount for the land? a. b. c. d.
The U.S. GAAP value is higher. The IFRS value is higher. US GAAP and IFRS give you the same amount because they are converged. The relationship between the two amounts depends on the depreciation method used by the subsidiary.
©Cambridge Business Publishers, 2023 7-32
Advanced Accounting, 5th Edition
ANS: 91.
92.
b [(5,100/100) x $0.10)] > $5
Topic: IFRS for consolidation of international subsidiaries LO 4 What is “presentation currency,” as used in IFRS? a. b. c. d.
The subsidiary’s functional currency The parent company’s reporting currency The currency in which the subsidiary reports its accounts The currency into which the subsidiary’s accounts are remeasured, prior to translation
ANS:
b
Topic: IFRS for consolidation of international subsidiaries LO 4 When converting the trial balance of an international subsidiary to the parent’s currency, IFRS and U.S. GAAP are converged, except for: a. b. c. d.
Remeasurement procedures Translation procedures Conversion when the subsidiary is in a highly inflationary country Choice of whether to use remeasurement or translation for a specific subsidiary
ANS:
c
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-33
PROBLEMS 1.
Topic: Translation and remeasurement of inventory and cost of goods sold LO 1 A U.S. parent owns a Singapore subsidiary. At the end of the current year, the subsidiary’s accounts are converted to U.S. dollars for consolidation. The subsidiary’s beginning inventory totals S$100,000, its purchases for the year are S$900,000, purchased evenly over the year, and its ending inventory is S$85,000. Rates are as follows ($/S$): Beginning of year When beginning inventory purchased When ending inventory purchased Average for year End of year
$0.75 0.74 0.79 0.78 0.80
Required a. Convert the subsidiary’s cost of goods sold and ending inventory balances to U.S. dollars, assuming its functional currency is the Singapore dollar. b. Convert the subsidiary’s cost of goods sold and ending inventory balances to U.S. dollars, assuming its functional currency is the U.S. dollar. ANS: a. b.
2.
Cost of goods sold = S$100,000 + S$900,000 – S$85,000 = S$915,000 x $0.78 = $713,700 Ending inventory = S$85,000 x $0.80 = $68,000 Cost of goods sold = (S$100,000 x $0.74) + (S$900,000 x $0.78) – (S$85,000 x $0.79) = $708,850 Ending inventory = S$85,000 x $0.79 = $67,150
Topic: Translation and remeasurement of operating expenses LO 1 A U.S. parent owns a Singapore subsidiary. At the end of the current year, the subsidiary’s accounts are converted to U.S. dollars for consolidation. The subsidiary’s operating expenses for the year total S$400,000, consisting of impairment losses on trademarks of S$50,000, depreciation expense on plant assets of S$100,000, and out-of-pocket expenses of S$250,000, incurred evenly over the year. Rates are as follows: Beginning of year When trademarks acquired When plant assets acquired Average for year End of year
$0.75 0.70 0.65 0.78 0.80
Required a. Convert the subsidiary’s operating expense balance to U.S. dollars, assuming its functional currency is the Singapore dollar. b. Convert the subsidiary’s operating expense balance to U.S. dollars, assuming its functional currency is the U.S. dollar.
©Cambridge Business Publishers, 2023 7-34
Advanced Accounting, 5th Edition
3.
ANS: a.
S$400,000 x $0.78 = $312,000
b.
(S$50,000 x $0.70) + (S$100,000 x $0.65) + (S$250,000 x $0.78) = $295,000
Topic: Translation and remeasurement of noncurrent assets and depreciation LO 1 The Australian subsidiary of a U.S. parent reports the following plant assets at December 31, 2024: • •
Buildings acquired at a cost of A$10,000 when the exchange rate was $0.65/A$, with accumulated depreciation of A$4,000. The buildings are being depreciated on a straightline basis over 20 years. Equipment acquired at a cost of A$40,000 when the exchange rate was $0.62/A$, with accumulated depreciation of A$15,000. The equipment is being depreciated on a straight-line basis over 10 years.
2024 exchange rates are as follows (US$/A$): January 1, 2024 Average for 2024 December 31, 2024
$0.77 0.78 0.80
Required a. Assume the subsidiary’s functional currency is the Australian dollar. Calculate the subsidiary’s translated buildings and equipment, at cost, and related accumulated depreciation, at December 31, 2024, and its translated depreciation expense for 2024. b. Assume the subsidiary’s functional currency is the U.S. dollar. Calculate the subsidiary’s remeasured buildings and equipment, at cost, and related accumulated depreciation, at December 31, 2024, and its remeasured depreciation expense for 2024. ANS: a. A$
Rate
US $
Building Building cost Accumulated depreciation Building depreciation expense
A$10,000 4,000 500
$0.80 0.80 0.78
$ 8,000 3,200 390
Equipment Equipment cost Accumulated depreciation Equipment depreciation expense
40,000 15,000 4,000
0.80 0.80 0.78
32,000 12,000 3,120
Totals Buildings & equipment, cost Accumulated depreciation Depreciation expense
Test Bank, Chapter 7
$40,000 15,200 3,510
©Cambridge Business Publishers, 2023 7-35
b. A$
Rate
US $
Building Building cost Accumulated depreciation Building depreciation expense
A$10,000 4,000 500
$0.65 0.65 0.65
$ 6,500 2,600 325
Equipment Equipment cost Accumulated depreciation Equipment depreciation expense
40,000 15,000 4,000
0.62 0.62 0.62
24,800 9,300 2,480
Totals Buildings & equipment, cost Accumulated depreciation Depreciation expense 4.
$31,300 11,900 2,805
Topic: Translation and remeasurement of inventory and cost of goods sold LO 1 A U.K. subsidiary of a U.S. parent reports the following information in its accounts: • • •
Beginning inventory, £20,000 Purchases, £175,000 Ending inventory, £18,000
The subsidiary uses FIFO, and its beginning inventory consists of £15,000 purchased when the exchange rate was $1.42/£, and £5,000 purchased when the exchange rate was $1.41/£. Purchases of inventory occurred evenly throughout the year. The subsidiary’s ending inventory consists of £12,000 purchased when the exchange rate was $1.38/£, and £6,000 purchased when the exchange rate was $1.37/£. The average exchange rate for the year was $1.39/£, and the rate at the end of the year was $1.36/£. Required a. Assume the subsidiary’s functional currency is the pound sterling. Calculate the subsidiary’s translated ending inventory, and its translated cost of goods sold for the year. b. Assume the subsidiary’s functional currency is the U.S. dollar. Calculate the subsidiary’s remeasured ending inventory, and its remeasured cost of goods sold for the year. ANS: a. Ending inventory Cost of goods sold £20,000 + £175,000 – £18,000
©Cambridge Business Publishers, 2023 7-36
£ £ 18,000 177,000
Rate $1.36 1.39
US $ $ 24,480 $ 246,030
Advanced Accounting, 5th Edition
b. Ending inventory: Total Cost of goods sold: Beginning inventory:
Plus purchases Less ending inventory Total 5.
£ £ 12,000 6,000 18,000
Rate $1.38 1.37
US $ $ 16,560 8,220 $ 24,780
15,000 5,000
1.42 1.41
$ 21,300 7,050 28,350 243,250 (24,780) $246,820
175,000 1.39 (18,000) see above 148,000
Topic: Translation and remeasurement of inventory and cost of goods sold LO 1 A U.S. parent owns a Hong Kong subsidiary. It is the end of the year and the subsidiary’s accounts are converted to U.S. dollars, for consolidation with the parent’s accounts. The subsidiary reports the following information in its accounts: • • •
Beginning inventory, HK$50,000 Purchases, HK$800,000 Ending inventory, HK$60,000
The subsidiary uses FIFO for inventory valuation. Its beginning inventory consists of HK$40,000 purchased when the exchange rate was $0.124/HK$, and HK$10,000 purchased when the exchange rate was $0.126/HK$. Purchases and sales of inventory occurred evenly throughout the year. The subsidiary’s ending inventory consists of HK$55,000 purchased when the exchange rate was $0.132/HK$, and HK$5,000 purchased when the exchange rate was $0.134/HK$. The average exchange rate for the year was $0.130/HK$, and the rate at the end of the year was $0.135/HK$. Required a. Assume the subsidiary’s functional currency is the Hong Kong dollar. Calculate its ending inventory and cost of goods sold for the year, in U.S. dollars. b. Assume the subsidiary’s functional currency is the U.S. dollar. Calculate its ending inventory and cost of goods sold for the year, in U.S. dollars. ANS: a. Ending inventory Cost of goods sold (HK$50,000 + HK$800,000 – HK$60,000)
Test Bank, Chapter 7
HK$ HK$ 60,000
Rate $0.135
US $ $ 8,100
790,000
0.130
$ 102,700
©Cambridge Business Publishers, 2023 7-37
b. HK$
Rate
US $
HK$ 55,000 5,000 60,000
$0.132 0.134
$ 7,260 670 $ 7,930
40,000 10,000
0.124 0.126
$ 4,960 1,260 6,220 104,000 (7,930) $102,290
Ending inventory:
Total Cost of goods sold: Beginning inventory:
Plus purchases Less ending inventory Total 6.
800,000 0.130 (60,000) see above 790,000
Topic: Translation and remeasurement of operating expenses LO 1 A U.S. parent has a subsidiary in Malaysia, and its accounts are measured in ringgits (RM). It is the end of the year, and the subsidiary’s accounts are converted to U.S. dollars, for consolidation with the parent’s accounts. The subsidiary reports RM1,000,000 in operating expenses for the year, consisting of RM300,000 in selling expenses and RM700,000 in administrative expenses. Detail for each expense category is as follows: Selling expense: Amortization expense Depreciation expense Salary and utility expense Administrative expense: Amortization expense Depreciation expense Salary and utility expense Total operating expenses
RM 20,000 50,000 230,000 10,000 200,000 490,000
RM 300,000
700,000 RM1,000,000
Amortization expense is a write-off of identifiable intangibles recognized when the subsidiary was acquired; the exchange rate at that time was $0.23/RM. Depreciation expense is a write-off of plant assets, as follows: Plant assets on hand when the subsidiary was acquired Plant assets acquired when the exchange rate was $0.21/RM Plant assets acquired when the exchange rate was $0.18/RM Total depreciation expense
RM200,000 20,000 30,000 RM250,000
Total depreciation expense is divided between selling and administrative expenses in a 1:4 ratio. Salary and utility expense is incurred evenly throughout the year. The average rate for the year was $0.15/RM, and the rate at year-end is $0.12/RM.
©Cambridge Business Publishers, 2023 7-38
Advanced Accounting, 5th Edition
Required a. Assume the subsidiary’s functional currency is the ringgit. Calculate the subsidiary’s selling expense and its administrative expense for the year, in U.S. dollars. b. Assume the subsidiary’s functional currency is the U.S. dollar. Calculate the subsidiary’s selling expense and its administrative expense for the year, in U.S. dollars. ANS: a.
Selling expense: Administrative expense:
b. Depreciation expense: RM200,000 x $0.23 RM20,000 x $0.21 RM30,000 x $0.18 Total depreciation expense Selling expense: Amortization expense Depreciation expense Salary and utility expense Total selling expense Administrative expense: Amortization expense Depreciation expense Salary and utility expense Total administrative expense 7.
RM300,000 x $0.15 = RM 700,000 x $0.15 =
$ 45,000 $105,000
$46,000 4,200 5,400 $55,600
RM 20,000 50,000 230,000
x $0.23 = $55,600 x 1/5 = x $0.15 =
$ 4,600 11,120 34,500 $ 50,220
10,000 200,000 490,000
x $0.23 = $55,600 x 4/5 = x $0.15 =
$
2,300 44,480 73,500 $ 120,280
Topic: Translation and remeasurement gains and losses LO 1 On January 1, 2024, a Hong Kong subsidiary was acquired by a U.S. company. The subsidiary’s trial balances for the beginning and end of 2024 appear below, in Hong Kong dollars (HK$):
Cash and receivables Plant assets, net Liabilities Capital stock Retained earnings, beginning Sales revenue Depreciation expense Other operating expenses
January 1, 2024 Dr (Cr) HK$ 2,000 10,000 (9,000) (500) (2,500)
HK$
Test Bank, Chapter 7
______ 0
December 31, 2024 Dr (Cr) HK$ 1,600 9,000 (7,100) (500) (2,500) (8,000) 1,000 _6,500 HK$ 0
©Cambridge Business Publishers, 2023 7-39
Sales revenue and other operating expenses occurred evenly during 2024. Exchange rates (U.S. dollars/HK$) are as follows: January 1, 2024 $0.135 Average for 2024 0.120 December 31, 2024 0.100 Required a. The subsidiary’s functional currency is the Hong Kong dollar. Calculate the translation gain or loss for 2024. Specify whether it is a gain or loss. b. The subsidiary’s functional currency is the U.S. dollar. Calculate the remeasurement gain or loss for 2024. Specify whether it is a gain or loss. ANS: a. Beginning exposed position Changes in exposed position: + Net income Ending exposed position Translation loss (OCL)
HK$ HK$ 3,000
Rate $0.135
US $ $ 405
500
0.120
HK$ 3,500
0.100
60 465 350 $ 115
HK$ HK$ (7,000)
Rate $0.135
US $ $ (945)
8,000 (6,500)
0.120 0.120
HK$ (5,500)
0.100
960 (780) (765) (550) $ 215
b. Beginning exposed position Changes in exposed position: + Sales – Other operating expenses Ending exposed position Remeasurement gain (income) 8.
Topic: Translation and remeasurement gains and losses LO 1 A Singapore subsidiary’s trial balances for the beginning and end of 2024 appear below, in Singapore dollars (S$):
Cash and receivables Inventories Plant assets, net Liabilities Capital stock Retained earnings, beginning Sales Cost of goods sold Depreciation expense Other operating expenses
January 1, 2024 Dr (Cr) S$ 400 8,000 15,000 (18,400) (2,000) (3,000)
S$ ©Cambridge Business Publishers, 2023 7-40
_____ 0
December 31, 2024 Dr (Cr) S$ 1,500 7,500 14,500 (18,000) (2,000) (3,000) (12,000) 8,000 1,000 _2,500 S$ 0 Advanced Accounting, 5th Edition
Sales, inventory purchases and other operating expenses occurred evenly during 2024. The plant assets on hand at the beginning of the year were purchased when the exchange rate was $0.75/S$. Plant assets of S$500 were purchased in 2024, when the exchange rate was $0.752/S$. Other exchange rates (U.S. dollars/S$) are as follows: January 1, 2024 Average for 2024 December 31, 2024
$0.750 0.754 0.760
Required a. The subsidiary’s functional currency is the Singapore dollar. Calculate the translation gain or loss for 2024. Specify whether it is a gain or loss. b. The subsidiary’s functional currency is the U.S. dollar. Calculate the remeasurement gain or loss for 2024. Specify whether it is a gain or loss. ANS: a. Beginning exposed position Changes in exposed position: + Net income Ending exposed position Translation gain (OCI)
S$ S$ 5,000
Rate $0.75
US $ $3,750
500
0.754
S$ 5,500
0.760
377 4,127 4,180 $ 53
S$ S$(18,000)
Rate $0.750
US $ $(13,500)
12,000 (7,500) (2,500) (500)
0.754 0.754 0.754 0.752
S$(16,500)
0.760
9,048 (5,655) (1,885) (376) (12,368) (12,540) $ 172
b. Beginning exposed position Changes in exposed position: + Sales – Purchases – Other operating expenses – Plant asset purchase Ending exposed position Remeasurement loss (income)
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-41
9.
Topic: Translation and remeasurement gains and losses LO 1 The 2024 beginning and ending trial balances of a German subsidiary of a U.S. company appear below, in euros.
Cash and receivables Inventories at cost Plant and equipment, net Liabilities Capital stock Retained earnings, January 1 Dividends Sales Cost of goods sold Operating expenses Total
January 1 Dr(Cr) € 40,000 100,000 500,000 (400,000) (50,000) (190,000)
_______ € 0
December 31 Dr (Cr) € 50,000 110,000 560,000 (440,000) (50,000) (190,000) 60,000 (1,400,000) 950,000 350,000 € 0
Exchange rates ($/€) are: January 1, 2024 Average for 2024 December 31, 2024
$1.23 1.22 1.20
Additional information: 1. 2. 3. 4.
Dividends were declared on November 1, 2024, when the exchange rate was $1.21. Sales, inventory purchases, and out-of-pocket operating expenses were incurred evenly during the year. Plant and equipment on hand at the beginning of the year was purchased when the exchange rate was $1.23/€. Equipment of €80,000 was acquired during 2024, when the exchange rate was $1.225. Depreciation of €20,000 is included in operating expenses. Of that amount, €4,000 relates to plant and equipment acquired during 2024.
Required a. Assume the subsidiary’s functional currency is the U.S. dollar. Compute the remeasurement gain or loss for 2024. Specify whether it is a gain or a loss. b. Assume the subsidiary’s functional currency is the euro. Compute the translation gain or loss for 2024. Specify whether it is a gain or a loss.
©Cambridge Business Publishers, 2023 7-42
Advanced Accounting, 5th Edition
ANS: a. Beginning exposed position (€40,000 – €400,000) + Sales – Purchases (€950,000 + €10,000) – Out of pocket expenses (€350,000 – €20,000) – Equipment purchase – Dividends Ending exposed position Remeasurement gain (income)
€ € (360,000) 1,400,000 (960,000) (330,000) (80,000) (60,000)
$/€ $1.23 1.22 1.22 1.22 1.225 1.21
€ (390,000)
1.20
€ € 240,000 100,000 (60,000)
$/€ 1.23 1.22 1.21
€ 280,000
1.20
$ $ (442,800) 1,708,000 (1,171,200) (402,600) (98,000) (72,600) (479,200) - (468,000) $ 11,200
b. Beginning exposed position (€50,000 + €190,000) + Net income – Dividends Ending exposed position Translation loss (OCL) 10.
$ $ 295,200 122,000 (72,600) 344,600 336,000 $ 8,600
Topic: Translation and remeasurement gains and losses LO 1 A U.S. company has a subsidiary in Brazil. The subsidiary’s beginning and ending trial balances for 2024 are as follows, reported in the Brazilian currency, the real (R):
Cash Fixed assets, net Liabilities Capital stock Retained earnings, beginning Sales Depreciation expense Other expenses
January 1, 2024 Dr (Cr) R 400,000 1,800,000 (2,000,000) (230,000) 30,000
December 31, 2024 Dr (Cr) R 460,000 2,100,000 (2,210,000) (230,000) 30,000 (3,100,000) 250,000 2,700,000 R 0
_________ R 0
Exchange rates are as follows ($/R): January 1, 2024 Average for 2024 December 31, 2024
Test Bank, Chapter 7
$0.20 0.22 0.23
©Cambridge Business Publishers, 2023 7-43
Required a. Assume the subsidiary’s functional currency is the real. Calculate the translation gain or loss, appearing as a component of 2024 translated other comprehensive income. b. Assume the subsidiary’s functional currency is the U.S. dollar. Sales and out-of-pocket expenses were incurred evenly throughout the year. Fixed asset purchases for the year occurred when the exchange rate was $0.21. Calculate the remeasurement gain or loss, appearing as a component of 2024 income. ANS: a. Beginning net assets Net income Ending net assets Translation gain (OCI) b. Beginning exposure Sales Out-of-pocket expenses Fixed asset purchases Ending exposure Remeasurement loss (income) 11.
R200,000 x $0.20 150,000 x $0.22 R350,000 x $0.23
R(1,600,000) x $0.20 3,100,000 x $0.22 (2,700,000) x $0.22 (550,000) x $0.21 R(1,750,000) x $0.23
$ 40,000 33,000 73,000 - 80,500 $ 7,500
$ (320,000) 682,000 (594,000) (115,500) (347,500) (402,500) $ 55,000
Topic: Ending trial balance, translation and remeasurement gains and losses LO 1 A U.S. company acquired a subsidiary in the U.K. at the beginning of the year. The subsidiary’s trial balance at the date of acquisition was as follows:
Cash Inventories Equipment, net Liabilities Capital stock Retained earnings
Dr (Cr) £ 100 400 800 (1,150) (50) (100) £ 0
During the year, the subsidiary recorded sales revenue of £10,000 and purchased inventories of £7,500 evenly throughout the year. All were cash transactions. The subsidiary incurred operating expenses of £2,000, of which £200 was depreciation on equipment. The out-of-pocket operating expenses occurred evenly throughout the year and were paid in cash. Equipment of £100 was purchased during the year, for cash, when the exchange rate was $1.37/£. Of the liabilities outstanding at the beginning of the year, £500 were paid in cash evenly throughout the year. The subsidiary’s ending inventory balance was £350. Other exchange rate information as follows ($/£): Beginning of year $1.36 Average for year 1.38 End of year 1.40 ©Cambridge Business Publishers, 2023 7-44
Advanced Accounting, 5th Edition
Required a. Present the subsidiary’s end-of-year trial balance, in pounds sterling. b. Prepare a schedule calculating the subsidiary’s translation gain or loss, assuming its functional currency is the pound sterling. Specify whether it is a gain or loss. c. Prepare a schedule calculating the subsidiary’s remeasurement gain or loss, assuming its functional currency is the U.S. dollar. Specify whether it is a gain or loss. ANS: a.
Cash Inventories Equipment, net Liabilities Capital stock Retained earnings, beg Sales revenue Cost of goods sold Operating expenses
Beginning of year Dr (Cr) £ 100 400 800 (1,150) (50) (100) ---£ 0
End of year Dr (Cr) £ 200 350 700 (650) (50) (100) (10,000) 7,550 2,000 £ 0
b. Beginning exposed position + Net income Ending exposed position Translation gain (OCI)
£ £ 150 450
$/£ 1.36 1.38
£ 600
1.40
£ £ (1,050) 10,000 (7,500) (1,800) (100)
$/£ $1.36 1.38 1.38 1.38 1.37
£ (450)
1.40
$ $ 204 621 825 840 $ 15
c. Beginning exposed position + Sales revenue – Purchases – Out of pocket expenses – Equipment purchase Ending exposed position Remeasurement loss (income)
Test Bank, Chapter 7
$ $ (1,428) 13,800 (10,350) (2,484) (137) (599) (630) $ 31
©Cambridge Business Publishers, 2023 7-45
12.
Topic: Translation of subsidiary trial balance LO 1 A U.S. parent acquires a new subsidiary on January 1, 2024. The subsidiary’s functional currency is the euro. The subsidiary’s December 31, 2024 trial balance is presented below, in euros.
Cash, receivables Inventories, at cost Plant assets, net Liabilities Capital stock Retained earnings, beginning Dividends Sales revenue Cost of goods sold Operating expenses Total
December 31, 2024 Dr (Cr) € 20,000 90,000 550,000 (440,000) (200,000) 0 10,000 (2,000,000) 1,150,000 820,000 € 0
Additional information: • • • •
Sales revenue, inventory purchases, and out-of-pocket operating expenses occurred evenly through the year. Ending inventory was purchased when the exchange rate was $1.27/€. Operating expenses consist of €670,000 in out-of-pocket expenses and €150,000 in depreciation of plant assets. Dividends were declared when the exchange rate was $1.26/€.
Exchange rates (US$/€) are: January 1, 2024 2024 average December 31, 2024
$1.22 1.25 1.28
Required a. Calculate the translation gain or loss for 2024. Specify whether it is a gain or loss. b. Translate the subsidiary’s December 31, 2024 trial balance into U.S. dollars. ANS: a. Beginning exposure Changes in exposure: + Net income – Dividends Ending exposure Translation gain (OCI)
©Cambridge Business Publishers, 2023 7-46
€ €200,000
Rate $ 1.22
$ $ 244,000
30,000 (10,000)
1.25 1.26
€220,000
1.28
37,500 (12,600) 268,900 281,600 $ 12,700
Advanced Accounting, 5th Edition
b.
Cash, receivables Inventories, at cost Plant assets, net Liabilities Capital stock Retained earnings, beginning Dividends Sales revenue Cost of goods sold Operating expenses Other comprehensive gain Total 13.
€ Dr (Cr) € 20,000 90,000 550,000 (440,000) (200,000) 0 10,000 (2,000,000) 1,150,000 820,000 -€ 0
Rate $1.28 1.28 1.28 1.28 1.22 1.26 1.25 1.25 1.25 See Part a.
$ Dr (Cr) $ 25,600 115,200 704,000 (563,200) (244,000) 0 12,600 (2,500,000) 1,437,500 1,025,000 (12,700) $ 0
Topic: Remeasurement of subsidiary trial balance LO 1 A U.S. parent acquires a new subsidiary on January 1, 2024. The subsidiary’s functional currency is the U.S. dollar. The subsidiary’s trial balances for January 1 and December 31, 2024 are presented below, in euros.
Cash, receivables Inventories, at cost Plant assets, net Liabilities Capital stock Retained earnings, beginning Dividends Sales revenue Cost of goods sold Operating expenses Total
January 1, 2024 Dr (Cr) € 10,000 40,000 700,000 (550,000) (200,000) 0 ----€ 0
December 31, 2024 Dr (Cr) € 20,000 90,000 550,000 (440,000) (200,000) 0 10,000 (2,000,000) 1,150,000 820,000 € 0
Additional information: • • • •
Sales revenue, inventory purchases, and out-of-pocket operating expenses occurred evenly through the year. Ending inventory was purchased when the exchange rate was $1.27/€. Operating expenses consist of €670,000 in out-of-pocket expenses and €150,000 in depreciation of plant assets. Dividends were declared when the exchange rate was $1.26/€.
Exchange rates (US$/€) are: January 1, 2024 2024 average December 31, 2024
Test Bank, Chapter 7
$1.22 1.25 1.28 ©Cambridge Business Publishers, 2023 7-47
Required a. Calculate the remeasurement gain or loss for 2024. Specify whether it is a gain or loss. b. Remeasure the subsidiary’s December 31, 2024 trial balance into U.S. dollars. ANS: a. Beginning exposure Changes in exposure: + Sales revenue – Purchases – Out-of-pocket operating expenses – Dividends Ending exposure Remeasurement loss (income)
€ € (540,000)
Rate $1.22
$ $ (658,800)
2,000,000 (1,200,000) (670,000) (10,000)
1.25 1.25 1.25 1.26
€ (420,000)
1.28
2,500,000 (1,500,000) (837,500) (12,600) (508,900) (537,600) $ 28,700
b.
Cash, receivables Inventories, at cost Plant assets, net Liabilities Capital stock Retained earnings, beginning Dividends Sales revenue Cost of goods sold Operating expenses Remeasurement loss Total
€ Dr (Cr) € 20,000 90,000 550,000 (440,000) (200,000) 0 10,000 (2,000,000) 1,150,000 820,000 -€ 0
Rate $1.28 1.27 1.22 1.28 1.22 1.26 1.25 (1) (2) See Part a.
$ Dr (Cr) $ 25,600 114,300 671,000 (563,200) (244,000) 0 12,600 (2,500,000) 1,434,500 1,020,500 28,700 $ 0
(1) Beginning inventory Purchases Ending inventory Cost of goods sold
€ € 40,000 1,200,000 (90,000) €1,150,000
Rate $ 1.22 1.25 1.27
$ $ 48,800 1,500,000 (114,300) $1,434,500
€ € 670,000 150,000 € 820,000
Rate $ 1.25 1.22
$ $ 837,500 183,000 $1,020,500
(2) Out-of-pocket expenses Depreciation expense Total operating expenses
©Cambridge Business Publishers, 2023 7-48
Advanced Accounting, 5th Edition
14.
Topic: Remeasurement of trial balance LO 1 A U.S. parent acquired a subsidiary in New Zealand on July 1, 2023, the beginning of its fiscal year. The subsidiary’s functional currency is the U.S. dollar. Its July 1, 2023 and June 30, 2024 trial balances are as follows, in New Zealand dollars (NZ$):
Cash, receivables Inventories, at cost Plant & equipment, net Liabilities Capital stock Retained earnings, beginning Sales revenue Expenses
July 1, 2023 Dr (Cr) NZ$ 300,000 550,000 1,800,000 (1,500,000) (300,000) (850,000) ___________ NZ$ 0
June 30, 2024 Dr (Cr) NZ$ 430,000 600,000 1,950,000 (1,300,000) (300,000) (850,000) (5,500,000) 4,970,000 NZ$ 0
Exchange rates ($/NZ$) are: July 1, 2023 Average for fiscal 2024 June 30, 2024
$0.65 0.70 0.72
Additional information: 1. 2. 3. 4.
Expenses include cost of goods sold of NZ$3,500,000 and depreciation of NZ$100,000. Sales revenue, merchandise purchases, and out of pocket expenses were incurred evenly throughout the year. Plant and equipment of NZ$250,000 was purchased in fiscal 2024 when the exchange rate was $0.67/NZ$. Depreciation of NZ$30,000 was taken on the new plant and equipment for fiscal 2024. The ending inventory was purchased when the exchange rate was $0.71/NZ$.
Required a. Calculate the remeasurement gain or loss for fiscal 2024. Specify whether it is a gain or loss. b. Calculate the subsidiary’s remeasured total expenses for fiscal 2024. Expenses consist of cost of goods sold, out-of-pocket expenses, and depreciation expense. c. Prepare the subsidiary’s remeasured trial balance at June 30, 2024.
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-49
ANS: a. Beginning exposure (NZ$300,000 – NZ$1,500,000) Changes in exposure: Sales revenue Merchandise purchases Out-of-pocket expenses P&E purchases Ending exposure (NZ$430,000 – NZ$1,300,000) Remeasurement loss (income) b.
NZ$
Rate
$
NZ$ (1,200,000)
$ 0.65
$ (780,000)
5,500,000 (3,550,000) (1,370,000) (250,000)
0.70 0.70 0.70 0.67
3,850,000 (2,485,000) (959,000) (167,500) (541,500)
NZ$ (870,000)
0.72
(626,400) $ 84,900
Beginning inventory + Purchases – Ending inventory Cost of goods sold Out-of-pocket expenses
NZ$ 550,000 x $0.65 3,550,000 x $0.70 (600,000) x $0.71 3,500,000 1,370,000 x $0.70
Depreciation expense:
30,000 x $0.67 70,000 x $0.65 NZ$ 4,970,000
Total expenses
$ 357,500 2,485,000 (426,000) $ 2,416,500 959,000 20,100 45,500
65,600 $3,441,100
c.
Cash, receivables Inventories, at cost Plant & equipment, net Liabilities Capital stock Retained earnings, beg Sales revenue Expenses Remeasurement loss
(1)
NZ$ Dr (Cr) NZ$ 430,000 600,000 1,950,000 (1,300,000) (300,000) (850,000) (5,500,000) 4,970,000 -NZ$ 0
Rate $0.72 0.71 (1) 0.72 0.65 0.65 0.70 See above See above
U.S.$ Dr (Cr) $ 309,600 426,000 1,271,900 (936,000) (195,000) (552,500) (3,850,000) 3,441,100 84,900 $ 0
$1,730,000 x $0.65 = $1,124,500 $ 220,000 x $0.67 = 147,400 $1,271,900
©Cambridge Business Publishers, 2023 7-50
Advanced Accounting, 5th Edition
15.
Topic: Translation of trial balance LO 1 A U.S. parent acquired a subsidiary in New Zealand on July 1, 2023, the beginning of its fiscal year. The subsidiary’s functional currency is the New Zealand dollar. Its July 1, 2023 and June 30, 2024 trial balances are as follows, in New Zealand dollars (NZ$):
Cash, receivables Inventories, at cost Plant & equipment, net Liabilities Capital stock Retained earnings, beginning Sales revenue Expenses
July 1, 2023 Dr (Cr) NZ$ 300,000 550,000 1,800,000 (1,500,000) (300,000) (850,000) ___________ NZ$ 0
June 30, 2024 Dr (Cr) NZ$ 430,000 600,000 1,950,000 (1,300,000) (300,000) (850,000) (5,500,000) 4,970,000 NZ$ 0
Exchange rates ($/NZ$) are: July 1, 2023 Average for fiscal 2024 June 30, 2024
$0.65 0.70 0.72
Additional information: 1. 2. 3. 4.
Expenses include cost of goods sold of NZ$3,500,000 and depreciation of NZ$100,000. Sales revenue, merchandise purchases, and out of pocket expenses were incurred evenly throughout the year. Plant and equipment of NZ$250,000 was purchased in fiscal 2024 when the exchange rate was $0.67/NZ$. Depreciation of NZ$30,000 was taken on the new plant and equipment for fiscal 2024. The ending inventory was purchased when the exchange rate was $0.71/NZ$.
Required a. Calculate the translation gain or loss for fiscal 2024. Specify whether it is a gain or loss. b. Prepare the subsidiary’s translated trial balance at June 30, 2024. ANS: a. Beginning exposure (NZ$300,000 + NZ$850,000) + Net income Ending exposure Translation gain (OCI)
Test Bank, Chapter 7
NZ$
Rate
$
NZ$ 1,150,000 530,000
$ 0.65 0.70
NZ$ 1,680,000
0.72
$ 747,500 371,000 1,118,500 1,209,600 $ 91,100
©Cambridge Business Publishers, 2023 7-51
b.
Cash, receivables Inventories, at cost Plant & equipment, net Liabilities Capital stock Retained earnings, beg Sales revenue Expenses Translation gain (OCI)
16.
NZ$ Dr (Cr) NZ$ 430,000 600,000 1,950,000 (1,300,000) (300,000) (850,000) (5,500,000) 4,970,000 -NZ$ 0
U.S.$ Dr (Cr) $ 309,600 432,000 1,404,000 (936,000) (195,000) (552,500) (3,850,000) 3,479,000 (91,100) $ 0
Rate $0.72 0.72 0.72 0.72 0.65 0.65 0.70 0.70 See above
Topic: Translation gain or loss, translated trial balance LO 1 A U.S. parent acquired a U.K. subsidiary on January 1, 2024. The subsidiary’s functional currency is the pound sterling, and its December 31, 2024 trial balance is as follows:
Cash, receivables Inventories, at cost Plant & equipment, net Liabilities Capital stock Retained earnings, beginning Dividends Revenues Expenses
£ Dr (Cr) £ 180,000 330,000 1,050,000 (720,000) (180,000) (480,000) 120,000 (3,000,000) 2,700,000 £ 0
Exchange rates ($/£) are: January 1, 2024 Average for 2024 Rate when dividends paid December 31, 2024
$1.36 1.34 1.31 1.30
Required a. Calculate the translation gain or loss for 2024. Specify whether it is a gain or a loss. b. Translate the subsidiary’s December 31, 2024 trial balance.
©Cambridge Business Publishers, 2023 7-52
Advanced Accounting, 5th Edition
ANS: a. Beginning exposure Changes in exposure: + Net income – Dividends Ending exposure Translation loss
£ £ 660,000
Rate $1.36
US $ $ 897,600
300,000 (120,000)
1.34 1.31
£ 840,000
1.30
402,000 (157,200) 1,142,400 1,092,000 $ 50,400
b.
Cash, receivables Inventories, at cost Plant & equipment, net Liabilities Capital stock Retained earnings, beginning Dividends Revenues Expenses Other comprehensive loss
17.
£ Dr (Cr) £ 180,000 330,000 1,050,000 (720,000) (180,000) (480,000) 120,000 (3,000,000) 2,700,000 -£ 0
Rate $1.30 1.30 1.30 1.30 1.36 1.36 1.31 1.34 1.34 see Part a.
US $ Dr (Cr) $ 234,000 429,000 1,365,000 (936,000) (244,800) (652,800) 157,200 (4,020,000) 3,618,000 50,400 $ 0
Topic: Translation gain or loss, translated trial balance LO 1 A U.S. company acquired a subsidiary in Spain on January 1, 2024. The subsidiary’s summary trial balances for January 1 and December 31, 2024 are presented below, in euros. The subsidiary’s functional currency is the euro.
Cash, receivables Inventories, at cost Plant assets, net Liabilities Capital stock Retained earnings, beg. Revenues Expenses Other comprehensive income Total
January 1, 2024 Dr (Cr) € 15,000 250,000 650,000 (715,000) (200,000) ----€ 0
Exchange rates (US$/€) are: January 1, 2024 2024 average December 31, 2024
Test Bank, Chapter 7
December 31, 2024 Dr (Cr) € 20,000 350,000 950,000 (1,080,000) (200,000) -(840,000) 810,000 (10,000) € 0
$1.15 1.17 1.20 ©Cambridge Business Publishers, 2023 7-53
Required a. Calculate the 2024 translation gain or loss for the subsidiary. b. Present the subsidiary’s December 31, 2024 translated trial balance. ANS: a. Beginning exposed position + Net income + OCI Ending exposed position Translation gain (OCI)
€ € 200,000 30,000 10,000
Rate $1.15 1.17 1.17
€ 240,000
1.20
US $ $230,000 35,100 11,700 276,800 288,000 $ 11,200
b. € Dr (Cr) Cash, receivables € 20,000 Inventories, at cost 350,000 Plant assets, net 950,000 Liabilities (1,080,000) Capital stock (200,000) Retained earnings, beg -Revenues (840,000) Expenses 810,000 Translation gains (OCI) (10,000) € 0 (1) (€10,000 x $1.17) + $11,200 = $22,900
©Cambridge Business Publishers, 2023 7-54
Rate $1.20 1.20 1.20 1.20 1.15 -1.17 1.17 (1)
US $ Dr (Cr) $ 24,000 420,000 1,140,000 (1,296,000) (230,000) -(982,800) 947,700 (22,900) $ 0
Advanced Accounting, 5th Edition
18.
Topic: Trial balance translation LO 1 A U.S. company with a June 30 fiscal year-end acquired a subsidiary in Singapore on July 1, 2023. Following is information on the activities of the subsidiary during fiscal 2024, in Singapore dollars (S$):
Cash, receivables Inventories, at cost Plant assets, net Investments Liabilities Capital stock Retained earnings, beg. AOCI, beg. Sales revenue Cost of goods sold Depreciation expense Other expenses Unrealized gains (OCI) Total
Beginning trial balance Dr (Cr) S$ 2,000 40,000 300,000 8,000 (100,000) (50,000) (180,000) (20,000) -----S$ 0
Ending trial balance Dr (Cr) S$ 17,000 50,000 280,000 10,000 (95,000) (50,000) (180,000) (20,000) (800,000) 390,000 70,000 330,000 (2,000) S$ 0
Additional information: 1. Sales, inventory purchases, other expenses, and unrealized gains occurred evenly over the year. 2. The ending inventory was purchased when the exchange rate was $0.715/S$. 3. Plant assets of S$50,000 were purchased when the exchange rate was $0.67/S$. 4. Depreciation expense consists of S$60,000 on plant assets included as part of the acquisition at the beginning of the year, and S$10,000 on plant assets purchased during the year. 5. The unrealized gains recorded in OCI are increases in the value of AFS debt investments during the year. No investments were bought or sold during the year. 6. Exchange rates are as follows ($/S$): July 1, 2023 Average for fiscal 2024 June 30, 2024
$0.65 0.70 0.72
Required The subsidiary’s functional currency is the Singapore dollar. a. b.
Calculate the translation gain or loss for fiscal 2024. Present a schedule translating the subsidiary’s trial balance as of June 30, 2024 to U.S. dollars.
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-55
ANS: a. Beginning exposed position + Net income + Unrealized gains (OCI) Ending exposed position Translation gain (OCI)
S$ S$250,000 10,000 2,000
Rate $0.65 0.70 0.70
S$262,000
0.72
$ $ 162,500 7,000 1,400 170,900 188,640 $ 17,740
b.
Cash, receivables Inventories, at cost Plant assets, net Investments Liabilities Capital stock Retained earnings, beg. AOCI, beg. Sales revenue Cost of goods sold Depreciation expense Other expenses Unrealized gains (OCI) Translation gain (OCI) Total
©Cambridge Business Publishers, 2023 7-56
S$ Dr (Cr) S$ 17,000 50,000 280,000 10,000 (95,000) (50,000) (180,000) (20,000) (800,000) 390,000 70,000 330,000 (2,000) -S$ 0
Rate $0.72 0.72 0.72 0.72 0.72 0.65 0.65 0.65 0.70 0.70 0.70 0.70 0.70 See part a.
$ Dr (Cr) $ 12,240 36,000 201,600 7,200 (68,400) (32,500) (117,000) (13,000) (560,000) 273,000 49,000 231,000 (1,400) (17,740) $ 0
Advanced Accounting, 5th Edition
19.
Topic: Trial balance remeasurement LO 1 A U.S. company with a June 30 fiscal year-end acquired a subsidiary in Singapore on July 1, 2023. Following is information on the activities of the subsidiary during fiscal 2024, in Singapore dollars (S$):
Cash, receivables Inventories, at cost Plant assets, net Investments Liabilities Capital stock Retained earnings, beg. AOCI, beg. Sales revenue Cost of goods sold Depreciation expense Other expenses Unrealized gains (OCI) Total
Beginning trial balance Dr (Cr) S$ 2,000 40,000 300,000 8,000 (100,000) (50,000) (180,000) (20,000) -----S$ 0
Ending trial balance Dr (Cr) S$ 17,000 50,000 280,000 10,000 (95,000) (50,000) (180,000) (20,000) (800,000) 390,000 70,000 330,000 (2,000) S$ 0
Additional information: 1. Sales, inventory purchases, other expenses, and unrealized gains occurred evenly over the year. 2. The ending inventory was purchased when the exchange rate was $0.715/S$. 3. Plant assets of S$50,000 were purchased when the exchange rate was $0.67/S$. 4. Depreciation expense consists of S$60,000 on plant assets included as part of the acquisition at the beginning of the year, and S$10,000 on plant assets purchased during the year. 5. The unrealized gains recorded in OCI are increases in the value of AFS debt investments during the year. No investments were bought or sold during the year. 6. Exchange rates are as follows ($/S$): July 1, 2023 Average for fiscal 2024 June 30, 2024
$0.65 0.70 0.72
Required The subsidiary’s functional currency is the U.S. dollar. a. b.
Calculate the remeasurement gain or loss for fiscal 2024. Present a schedule remeasuring the subsidiary’s trial balance as of June 30, 2024 to U.S. dollars.
Note to instructor: This question tests students’ knowledge of how to remeasure AFS debt investments carried at fair value, and related unrealized gains and losses.
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-57
ANS: a. Beginning exposed position + Sales revenue - Inventory purchases - Other expenses - Plant assets acquired + Unrealized gains on investments Ending exposed position Remeasurement loss (income)
S$ S$(90,000) 800,000 (400,000) (330,000) (50,000) 2,000
Rate $0.65 0.70 0.70 0.70 0.67 0.70
S$(68,000)
0.72
$ $ (58,500) 560,000 (280,000) (231,000) (33,500) 1,400 (41,600) (48,960) $ 7,360
b.
Cash, receivables Inventories, at cost Plant assets, net Investments Liabilities Capital stock Retained earnings, beg. AOCI, beg. Sales revenue Cost of goods sold Depreciation expense Other expenses Remeasurement loss (income) Unrealized gains (OCI) Total
S$ Dr (Cr) S$ 17,000 50,000 280,000 10,000 (95,000) (50,000) (180,000) (20,000) (800,000) 390,000 70,000 330,000 -(2,000) S$ 0
Rate $ 0.72 0.715 (1) 0.72 0.72 0.65 0.65 0.65 0.70 (2) (3) 0.70 See part a. 0.70
$ Dr (Cr) $ 12,240 35,750 182,800 7,200 (68,400) (32,500) (117,000) (13,000) (560,000) 270,250 45,700 231,000 7,360 (1,400) $ 0
(1) [(S$300,000 – S$60,000) x $0.65] + [(S$50,000 – S$10,000) x $0.67] = $182,800 (2) (S$40,000 x $0.65) + (S$400,000 x $0.70) – (S$50,000 x $0.715) = $270,25 (3) (S$60,000 x $0.65) + (S$10,000 x $0.67) = $45,700
©Cambridge Business Publishers, 2023 7-58
Advanced Accounting, 5th Edition
20.
Topic: Translated trial balance, subsequent year after acquisition LO 1 The December 31, 2024 trial balance of Aldo, a British subsidiary of Walton Corporation, a U.S. company, appears below, expressed in pounds sterling. The pound sterling is Aldo’s functional currency. Aldo Trial Balance, December 31, 2024 Dr (Cr) Cash, receivables £ 2,500 Inventories, at cost 3,000 Plant & equipment, net 12,900 Liabilities (12,500) Capital stock (2,000) Retained earnings, beginning (3,000) Sales (40,000) Cost of sales 32,000 Depreciation expense 800 Other expenses 6,300 £ 0 Additional information: 1. The U.S. dollar balance in the cumulative translation adjustment account at December 31, 2023 was $3,400 (credit). 2. The U.S. dollar balance of translated retained earnings at December 31, 2023 was $1,200. 3. When Aldo was acquired by Walton, the exchange rate was $1.20/£. No capital stock changes have occurred since then. 4. Exchange rates ($/£) were as follows: January 1, 2024 Average for 2024 December 31, 2024 5. 6.
$1.40 1.34 1.30
Sales, purchases, and expenses other than depreciation occurred evenly throughout the year. The ending inventories were purchased when the exchange rate was $1.33. Aldo acquired its plant and equipment prior to its acquisition by Walton, when the exchange rate was $1.10.
Required a. Prepare a schedule calculating the translation gain or loss for 2024. b. Prepare Aldo’s translated trial balance at December 31, 2024. c. What is the balance in the cumulative translation adjustment account at December 31, 2024, and the U.S. dollar balance of translated retained earnings at December 31, 2024?
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-59
ANS: a.
Beginning net assets Net income
£ 5,000 x $1.40 = 900 x $1.34 =
Ending net assets Translation loss (OCI)
£ 5,900 x $1.30 =
$ 7,000 1,206 $8,206 7,670 $ 536
b.
Cash, receivables Inventories, at cost Plant & equipment, net Liabilities Capital stock Retained earnings, beginning AOCI, beginning Sales Cost of sales Depreciation expense Other expenses Translation loss (OCI) c.
£ Dr (Cr) £ 2,500 3,000 12,900 (12,500) (2,000) (3,000) -(40,000) 32,000 800 6,300 -£ 0
Rate $1.30 1.30 1.30 1.30 1.20 given given 1.34 1.34 1.34 1.34 see Part a.
$ Dr (Cr) $ 3,250 3,900 16,770 (16,250) (2,400) (1,200) (3,400) (53,600) 42,880 1,072 8,442 536 $ 0
Cumulative translation adjustment balance, December 31, 2024 = $(3,400) + $536 = $(2,864) Translated retained earnings, December 31, 2024 =$1,200 + ($53,600 - $42,880 $1,072 - $8,442) = $2,406
©Cambridge Business Publishers, 2023 7-60
Advanced Accounting, 5th Edition
21.
Topic: Translated and remeasured income and retained earnings, subsequent year after acquisition LO 1 Sagermart, located in Sweden, is a subsidiary of Parkesmart, a U.S. discount retail company. Sagermart maintains its financial information in krona (SEK), and reports the following financial results for 2024: Sales Cost of sales Operating expenses Dividends
SEK200,000 170,000 25,000 500
Additional information for 2024: Beginning retained earnings, remeasured Beginning retained earnings, translated Beginning net assets carried at fair value Beginning net assets Beginning inventory balance Ending inventory balance • • • •
$ 6,000 $ 4,000 SEK(20,000) SEK 8,000 SEK 600 SEK 1,600
Operating expenses include SEK5,000 in depreciation and amortization on assets acquired when the exchange rate was $0.15/SEK. Dividends were declared when the exchange rate was $0.128/SEK. Sales and inventory purchases were made evenly throughout the year. The beginning inventory was purchased when the exchange rate was $0.12/SEK, and the ending inventory was purchased when the exchange rate was $0.13/SEK.
Exchange rates ($/SEK): Beginning of 2024………………………………….. Average for 2024…………………………………… End of 2024………………………………..………….
$0.120 0.125 0.130
Required a. Assume the functional currency of Sagermart is the krona. Calculate the subsidiary’s translated net income for 2024 and its translated retained earnings at the end of 2024, in U.S. dollars. b. Assume the functional currency of Sagermart is the U.S. dollar. Calculate the subsidiary’s remeasured net income for 2024 and its remeasured retained earnings at the end of 2024, in U.S. dollars. ANS: a. Translated net income = (SEK200,000 – SEK170,000 – SEK25,000) x $0.125 = $625 Beginning translated retained earnings + Net income - Dividends Ending translated retained earnings
Test Bank, Chapter 7
SEK500 x $0.128
$4,000 625 (64) $4,561 ©Cambridge Business Publishers, 2023 7-61
b.
Remeasurement loss for 2024: Beginning exposure + Sales - Purchases - Out-of-pocket operating expenses - Dividends Ending exposure Remeasurement loss (income)
SEK $/SEK SEK(20,000) $0.120 SEK200,000 0.125 SEK(170,000 + 1,000) = SEK(171,000) 0.125 SEK(25,000 – 5,000) = SEK(20,000) 0.125 SEK(500) 0.128 SEK(11,500)
0.130
$ $ (2,400) 25,000 (21,375) (2,500) (64) (1,339) (1,495) $ 156
Calculation of remeasured net income: Sales - Cost of sales - Operating expenses - Remeasurement loss Remeasured net income
SEK SEK200,000 See schedule below See schedule below See schedule above
$/SEK $0.125
$ $ 25,000 (21,239) (3,250) (156) $ 355
$/SEK $0.120 0.125 0.130
$ $ 72 21,375 (208) $21,239
Remeasured cost of sales: Beginning inventory + Purchases - Ending inventory Remeasured cost of sales
SEK SEK 600 171,000 (1,600) SEK170,000
Remeasured operating expenses: Out-of-pocket expenses Depreciation/amortization Remeasured operating expenses Beginning remeasured retained earnings + Net income - Dividends Ending remeasured retained earnings
©Cambridge Business Publishers, 2023 7-62
SEK SEK 20,000 5,000 SEK25,000
$/SEK $0.125 0.150
See schedule above SEK500 x $0.128
$ $ 2,500 750 $ 3,250 $ 6,000 355 (64) $ 6,291
Advanced Accounting, 5th Edition
Use the following information to answer Questions 22 and 23. Oceanic, Inc. is a Canadian subsidiary of a U.S. company. The subsidiary began operations at the beginning of the current year, with assets consisting of a cash balance of C$400,000, acquired by issuing stock. Oceanic’s trial balance at the end of the year is as follows, in Canadian dollars: Dr (Cr) C$ 30,000 23,500 42,500 22,000 408,800 (102,000) (400,000) -(404,000) 333,000 27,500 18,700 C$ 0
Cash Receivables Inventories Land Equipment (net) Current payables Capital stock Retained earnings, beginning Sales revenue Cost of sales Depreciation expense Other expenses Total US $/C$ exchange rates are: Beginning of year Average for year End of year
$0.76 0.78 0.80
The land and equipment were acquired when the exchange rate was $0.76. Merchandise purchases, sales and other expenses occurred evenly over the year. The ending inventory was purchased when the exchange rate was $0.79. Depreciation expense relates to the equipment. 22.
Topic: Translation and financial analysis LO 1, 2 Assume the functional currency of Oceanic is the Canadian dollar. Required a. Prepare Oceanic’s end-of-year trial balance, in U.S. dollars. Show a separate schedule calculating the translation gain or loss for the year. b. Compute the following ratios, for both the Canadian dollar balances and the U.S. dollar balances: (1) (2) (3)
Current ratio Debt to assets ratio Gross profit percentage
Round your answers to the nearest tenth of a percent. Comment on similarities and differences between the local currency and translated ratios.
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-63
ANS: a.
Cash Receivables Inventories Land Equipment (net) Current payables Capital stock Retained earnings, beginning Sales revenue Cost of sales Depreciation expense Other expenses Translation gain (OCI) Total
C$ Dr (Cr) C$ 30,000 23,500 42,500 22,000 408,800 (102,000) (400,000) -(404,000) 333,000 27,500 18,700 ________ C$ 0
Rate $ 0.80 0.80 0.80 0.80 0.80 0.80 0.76 -0.78 0.78 0.78 0.78 see schedule
US $ Dr (Cr) $ 24,000 18,800 34,000 17,600 327,040 (81,600) (304,000) -(315,120) 259,740 21,450 14,586 (16,496) $ 0
Translation loss: Beginning net assets Net income Ending net assets Translation gain (OCI) b.
C$ C$ 400,000 24,800
Rate $0.76 0.78
424,800
0.80
U.S. $ $304,000 19,344 323,344 339,840 $ 16,496
Local currency ratios: Current ratio:
(C$30,000 + C$23,500 + C$42,500)/C$102,000 = 94.1%
Debt to assets:
C$102,000/(C$30,000 + C$23,500 + C$42,500 + C$22,000 + C$408,800) = 19.4%
Gross profit %:
(C$404,000 – C$333,000)/C$404,000 = 17.6%
Translated ratios are the same as above, because when translating from Canadian dollars to U.S. dollars, the numerator and denominator of each ratio are multiplied by the same exchange rate.
©Cambridge Business Publishers, 2023 7-64
Advanced Accounting, 5th Edition
23.
Topic: Remeasurement and financial analysis LO 1, 2 Assume the functional currency of Oceanic is the U.S. dollar. Required Repeat the requirements of Question 22. ANS: a.
Cash Receivables Inventories Land Equipment (net) Current payables Capital stock Retained earnings, beginning Sales revenue Cost of sales Depreciation expense Other expenses Remeasurement loss (income) Total
C$ Dr (Cr) C$ 30,000 23,500 42,500 22,000 408,800 (102,000) (400,000) -(404,000) 333,000 27,500 18,700 _______ C$ 0
Rate $ 0.80 0.80 0.79 0.76 0.76 0.80 0.76 -0.78 (5) 0.76 0.78 see schedule
C$ C$ 400,000 (22,000) (436,300) (375,500) 404,000 (18,700)
Rate $0.76 0.76 0.76 0.78 0.78 0.78
(48,500)
0.80
U.S. $ Dr (Cr) $ 24,000 18,800 33,575 16,720 310,688 (81,600) (304,000) -(315,120) 259,315 20,900 14,586 2,136 $ 0
Remeasurement gain: Beginning exposure (1) Land purchase Equipment purchase (2) Inventory purchases (3) Sales revenue Other expenses Ending exposure (4) Remeasurement loss (income)
(1) Beginning exposure is the cash balance. (2) C$408,800 + C$27,500 = C$436,300 (3) C$333,000 + C$42,500 = C$375,500 (4) C$30,000 + C$23,500 – C$102,000 = C$(48,500) (5) C$ Purchases C$375,500 Less ending inventory (42,500) Cost of sales C$333,000
Test Bank, Chapter 7
Rate $0.78 0.79
U.S. $ $ 304,000 (16,720) (331,588) (292,890) 315,120 (14,586) (36,664) (38,800) $ 2,136
U.S. $ $292,890 (33,575) $259,315
©Cambridge Business Publishers, 2023 7-65
b.
Local currency ratios: Current ratio:
(C$30,000 + C$23,500 + C$42,500)/C$102,000 = 94.1%
Debt to assets:
C$102,000/(C$30,000 + C$23,500 + C$42,500 + C$22,000 + C$408,800) = 19.4%
Gross profit %:
(C$404,000 – C$333,000)/C$404,000 = 17.6%
Remeasured ratios: Current ratio:
($24,000 + $18,800 + $33,575)/$81,600 = 93.6%
Debt to assets:
$81,600/($24,000 + $18,800 + $33,575 + $16,720 + $310,688) = 20.2%
Gross profit %:
($315,120 – $259,315)/$315,120 = 17.7%
Remeasured ratios are not the same as local currency ratios. In this case, the U.S. dollar is weakening, so historical rates are lower than current rates. Since inventories are remeasured at historical rates, the remeasured current ratio is lower and the remeasured gross profit percentage is higher. Remeasured total assets are lower so remeasured debt to assets is higher. 24.
Topic: Consolidation of international subsidiary at date of acquisition LO 3 A U.S. parent acquired a U.K. subsidiary when the exchange rate was $1.35/£, for an acquisition cost of £1,000,000. The subsidiary’s functional currency is the pound sterling. Its date-ofacquisition trial balance is as follows:
Cash, receivables Inventories, at cost Plant & equipment, net Liabilities Capital stock Retained earnings
Dr (Cr) £ 100,000 175,000 700,000 (575,000) (100,000) (300,000) £ 0
The subsidiary’s net assets were reported at amounts approximating fair value, except that it had previously unreported identifiable intangible assets valued at £150,000. Required a. Prepare a schedule, in U.S. dollars, calculating the excess of acquisition cost over the subsidiary’s book value at the acquisition date, and its allocation to the subsidiary’s identifiable net assets and goodwill. b. Prepare eliminating entries (E) and (R) to consolidate the trial balances of the parent and the subsidiary at the date of acquisition.
©Cambridge Business Publishers, 2023 7-66
Advanced Accounting, 5th Edition
ANS: a. Acquisition cost Book value Excess Revaluation: Identifiable intangibles Goodwill b.
£ £1,000,000 (400,000) 600,000
$/£ $ 1.35 1.35
US $ $1,350,000 (540,000) 810,000
(150,000) £ 450,000
1.35 1.35
(202,500) $ 607,500
(E) Capital stock Retained earnings
135,000 405,000 Investment in subsidiary
(R) Identifiable intangible assets Goodwill
540,000
202,500 607,500 Investment in subsidiary
25.
810,000
Topic: Consolidation of international subsidiary subsequent to acquisition, translation LO 3 A U.S. parent acquired a U.K. subsidiary when the exchange rate was $1.35/£, for an acquisition cost of £1,000,000. The subsidiary’s functional currency is the pound sterling. Its book value at the date of acquisition was £400,000, and the excess of acquisition cost over book value was allocated £150,000 to identifiable intangible assets and £450,000 to goodwill. In the first year, the identifiable intangible assets were amortized by £30,000. The average exchange rate for the year was $1.37/£ and the exchange rate at year-end was $1.40/£. Required a. Prepare a schedule calculating the net gain or loss recognized during consolidation at the end of the first year (the net amount recognized in the eliminating entries). b. Prepare the consolidation eliminating entries (E), (R) and (O), in journal form. ANS: a.
b.
Beginning revaluations Write-off
£ 600,000 x $1.35 = (30,000) x $1.37 =
Ending revaluations Translation gain (OCI)
£570,000 x $1.40 =
(E) Capital stock Retained earnings
135,000 405,000 Investment in subsidiary
Test Bank, Chapter 7
$ 810,000 (41,100) 768,900 798,000 $ 29,100
540,000
©Cambridge Business Publishers, 2023 7-67
(R) Identifiable intangible assets Goodwill
210,000 630,000
Investment in subsidiary 810,000 Translation gain (OCI) 30,000 Beginning revaluations are translated at $1.40, the credit to the investment = $1,350,000 - $540,000 = $810,000. (O) Amortization expense Translation loss (OCI)
41,100 900
Identifiable intangible assets 42,000 Amortization expense is translated at $1.37 and the credit to the identifiable intangibles is translated at $1.40. 26.
Topic: Consolidation eliminating entries for international subsidiary, translation, first year LO 3 On January 1, 2024, a U.S. parent paid KYD 1,500,000 to acquire a subsidiary in the Cayman Islands. The excess paid over book value, KYD 700,000, was attributed entirely to goodwill, which is not impaired. The subsidiary’s functional currency is the Cayman Islands dollar, and the subsidiary’s translated trial balance at December 31, 2024 is below, in U.S. dollars.
Cash & receivables Inventories, at cost Buildings & equipment, net Accounts and notes payable Capital stock Retained earnings, beginning Sales revenue Cost of goods sold Operating expenses Translation gain (OCI)
Dr (Cr) $ 104,000 650,000 3,900,000 (3,510,000) (120,000) (840,000) (7,000,000) 4,500,000 2,400,000 (84,000) $ 0
Exchange rates ($/KYD) are: January 1, 2024 Average for 2024 December 31, 2024
$1.20 1.25 1.30
Required a. Calculate the December 31, 2024 balance for the parent’s investment in subsidiary, on its own books. The parent uses the complete equity method to report its investment. b. Prepare eliminating entries (C), (E) and (R), to consolidate the trial balances of the parent and its subsidiary at December 31, 2024.
©Cambridge Business Publishers, 2023 7-68
Advanced Accounting, 5th Edition
ANS: a.
Equity in net income = $7,000,000 - $4,500,000 - $2,400,000 = $100,000 Equity in OCI = $84,000 Investment, January 1, 2024 Equity in net income, 2024 Equity in OCI, 2024 Investment, December 31, 2024
b.
KYD 1,500,000 x $1.20 =
(C) Equity in net income Equity in OCI
$1,800,000 100,000 84,000 $1,984,000
100,000 84,000 Investment in subsidiary
(E) Capital stock Retained earnings
184,000
120,000 840,000 Investment in subsidiary
(R) Goodwill (1)
960,000
910,000 Translation gain (OCI) Investment in subsidiary (2)
70,000 840,000
(1) KYD 700,000 x $1.30 = $910,000 (2) $1,800,000 – $960,000 = $840,000
27.
Topic: Consolidation eliminating entries for international subsidiary, remeasured, first year LO 3 On January 1, 2024, a U.S. parent paid KYD 1,500,000 to acquire a subsidiary in the Cayman Islands. The excess paid over book value, KYD 700,000, was attributed entirely to goodwill, which is not impaired. The subsidiary’s functional currency is the U.S. dollar, and the subsidiary’s remeasured trial balance at December 31, 2024 is below, in U.S. dollars.
Cash & receivables Inventories, at cost Buildings & equipment, net Accounts and notes payable Capital stock Retained earnings, beginning Sales revenue Cost of goods sold Operating expenses Remeasurement loss (income)
Test Bank, Chapter 7
Dr (Cr) $ 104,000 645,000 3,600,000 (3,510,000) (120,000) (840,000) (7,000,000) 4,457,500 2,375,000 288,500 $ 0
©Cambridge Business Publishers, 2023 7-69
Exchange rates ($/KYD) are: January 1, 2024 Average for 2024 December 31, 2024
$1.20 1.25 1.30
Required a. Calculate the December 31, 2024 balance for the parent’s investment in subsidiary, on its own books. The parent uses the complete equity method to report its investment. b. Prepare eliminating entries (C), (E) and (R), to consolidate the trial balances of the parent and its subsidiary at December 31, 2024. ANS: a.
Equity in net loss = $7,000,000 - $4,457,500 - $2,375,000 - $288,500 = $(121,000) Investment, January 1, 2024 Equity in net loss, 2024 Investment, December 31, 2024
b.
KYD 1,500,000 x $1.20 =
(C) Investment in subsidiary
$1,800,000 (121,000) $1,679,000
121,000 Equity in net loss
121,000
(E) Capital stock Retained earnings
120,000 840,000 Investment in subsidiary
(R) Goodwill (1)
960,000
840,000 Investment in subsidiary
840,000
(1) KYD 700,000 x $1.20 = $840,000
28.
Topic: Consolidation of an international subsidiary, one year after acquisition LO 3 Pacific Imports, a U.S. company, acquired a wholly-owned subsidiary located in Singapore, on January 1, 2024 for S$400,000. The subsidiary’s functional currency is the Singapore dollar (S$). The balance sheet of the subsidiary at the date of acquisition was as follows: Assets Current assets Noncurrent assets, net Total assets
S$ 60,000 300,000 S$ 360,000
Liabilities and Stockholders' Equity Liabilities Capital stock Retained earnings Total liabilities and stockholders' equity
S$ 120,000 160,000 80,000 S$ 360,000
©Cambridge Business Publishers, 2023 7-70
Advanced Accounting, 5th Edition
Appropriate revaluations of the subsidiary’s assets at the date of acquisition are as follows: • • •
Inventories are undervalued by S$1,000. Inventories were sold in 2024. Noncurrent assets are undervalued by S$20,000. The noncurrent assets have a 10-year remaining life, straight-line. Identifiable indefinite life intangible assets, previously unreported, have a fair value of S$10,000.
During 2024, there was no impairment of any assets. The exchange rate on January 1, 2024 was $0.75/S$. The average rate for 2024 was $0.77/S$, and the rate at the end of 2024 was $0.80/S$. Required Prepare eliminating entries (E), (R) and (O) necessary to consolidate the December 31, 2024 trial balances of Pacific Imports and its Singapore subsidiary. ANS: (E) Capital stock (1) Retained earnings (2)
120,000 60,000 Investment in subsidiary
180,000
(1) S$160,000 x $0.75 = $120,000 (2) S$80,000 x $0.75 = $60,000
(R) Current assets (3) Noncurrent assets (4) Intangible assets (5) Goodwill (6)
800 16,000 8,000 103,200 Investment in subsidiary (7) Translation gain (OCI)
(3) (4) (5) (6)
120,000 8,000
S$1,000 x $0.80 = $800 S$20,000 x $0.80 = $16,000 S$10,000 x $0.80 = $8,000 Original goodwill calculation:
Acquisition cost S$400,000 Less book value (240,000) Less revaluations: Inventories (1,000) Noncurrent assets (20,000) Identifiable intangible assets (10,000) Goodwill S$129,000 S$129,000 x $0.80 = $103,200 (7) S$400,000 x $0.75 = $300,000 - $180,000 = $120,000
(O) Cost of goods sold (8) Depreciation expense (9) Translation loss (OCI)
770 1,540 90 Current assets (3) Noncurrent assets (10)
800 1,600
(8) S$1,000 x $0.77 = $770 (9) S$2,000 x $0.77 = $1,540 (10) S$2,000 x $0.80 = $1,600 Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-71
29.
Topic: Translation and consolidation of an international subsidiary, first year LO 3 Scientific Inc. is a Singapore subsidiary of Preston Company, U.S. company. On January 1, 2024, Preston acquired the voting stock of Scientific for S$24,000. Scientific’s book value was S$4,000 at the date of acquisition. The S$20,000 excess of acquisition cost over book value was allocated as follows: • S$10,000 overvaluation of plant assets with a 10-year remaining life, straight-line • S$9,000 to previously unrecorded identifiable intangibles with a 3-year life, straight-line • S$21,000 to goodwill; there was no impairment in 2024 It is now December 31, 2024. Scientific’s functional currency is the Singapore dollar. Exchange rates are as follows: January 1, 2024 $0.80/S$ Average for 2024 0.75/S$ December 31, 2024 0.70/S$ Scientific’s trial balance at December 31, 2024, in Singapore dollars, is below. December 31, 2024 Dr (Cr) Current assets S$ 8,000 Plant & equipment 55,000 Liabilities (52,000) Capital stock (1,000) Retained earnings, beginning (3,000) Sales revenue (70,000) Cost of goods sold 51,000 Operating expenses 12,000 S$ 0 Required a. Calculate Scientific’s translation gain or loss for the year, appearing in its translated December 31, 2024 trial balance. b. Translate Scientific’s December 31, 2024 trial balance into U.S. dollars. c. Preston uses the complete equity method to report its investment in Scientific. Calculate equity in net income of Scientific, and the December 31, 2024 balance for Investment in Scientific, reported on Preston’s books. d. Prepare eliminating entries (C), (E), (R) and (O) necessary to consolidate the December 31, 2024 trial balances of Preston and Scientific, in journal entry form. ANS: a. Beginning exposure Change in exposure: + Net income Ending exposure Translation loss (OCI)
©Cambridge Business Publishers, 2023 7-72
S$ S$ 4,000
Rate $ 0.80
$ $ 3,200
7,000
0.75
S$11,000
0.70
5,250 8,450 7,700 $ 750
Advanced Accounting, 5th Edition
b.
Current assets Plant & equipment Liabilities Capital stock Retained earnings, beginning Sales revenue Cost of goods sold Operating expenses Translation loss (OCI)
S$ Dr (Cr) S$ 8,000 55,000 (52,000) (1,000) (3,000) (70,000) 51,000 12,000 -S$ 0
Rate $ 0.70 0.70 0.70 0.80 0.80 0.75 0.75 0.75 see Part a.
$ Dr (Cr) $ 5,600 38,500 (36,400) (800) (2,400) (52,500) 38,250 9,000 750 $ 0
S$ S$7,000 1,000 (3,000) S$5,000
Rate $ 0.75 0.75 0.75 0.75
$ $5,250 750 (2,250) $3,750
c. Reported net income P&E write-off Intangibles write-off Equity in net income
The investment is initially recorded at S$24,000 x $0.80 = $19,200 $19,200 + $3,750 - $750 = $22,200 Investment in Scientific balance, December 31, 2024 d.
(C) Equity in net income
3,750 Equity in OCL Investment in Scientific
(E) Capital stock Retained earnings, beginning
750 3,000
800 2,400 Investment in Scientific
(R) Goodwill (1) Identifiable intangibles (2) Translation loss (OCI)
14,700 6,300 2,000 Plant assets (3) Investment in Scientific (4)
(1) (2) (3) (4)
Test Bank, Chapter 7
3,200
7,000 16,000
S$21,000 x $0.70 = $14,700 S$9,000 x $0.70 = $6,300 $10,000 x $0.70 $22,200 – $3,000 – $3,200 = $16,000
©Cambridge Business Publishers, 2023 7-73
(O) Operating expenses (5) Plant assets (6)
1,500 700 Identifiable intangibles (7) Translation gain (OCI)
(5) S$2,000 x $0.75 = $1,500 (6) S$1,000 x $0.70 = $700 (7) S$3,000 x $0.70 = $2,100
30.
Topic: Translation and consolidation of an international subsidiary, first year LO 3 Swire Ltd., located in Hong Kong, is a wholly-owned subsidiary of Plato Company, a U.S. company. On January 1, 2024, Plato acquired the voting stock of Swire for HK$100,000 in cash. Swire’s book value was HK$30,000 at the date of acquisition. The HK$70,000 excess of acquisition cost over book value was allocated entirely to goodwill. Plato Company uses the complete equity method to account for its investment in the subsidiary on its own books. It is now December 31, 2024. Goodwill impairment during 2024 was HK$5,000. Exchange rates are as follows: January 1, 2024 Average for 2024 December 31, 2024
$0.16/HK$ $0.20/HK$ $0.25/HK$
Swire’s functional currency is the Hong Kong dollar. Its trial balance at December 31, 2024, in Hong Kong dollars, is below.
Cash, receivables Inventories Plant & equipment, net Liabilities Capital stock Retained earnings, January 1 Sales revenue Cost of goods sold Operating expenses
December 31, 2024 Dr (Cr) HK$ 2,000 13,000 500,000 (476,000) (10,000) (20,000) (250,000) 120,000 121,000 HK$ 0
Required a. Calculate Swire’s translation gain or loss for 2024, appearing in its translated December 31, 2024 trial balance. b. Translate Swire’s December 31, 2024 trial balance into U.S. dollars. c. Prepare the journal entries Plato makes on its own books to (1) record the initial investment, (2) recognize Swire’s 2020 net income and (3) recognize Swire’s other comprehensive income. d. Present, in journal entry form, the eliminating entries necessary to consolidate the December 31, 2024 trial balances of Plato and Swire.
©Cambridge Business Publishers, 2023 7-74
Advanced Accounting, 5th Edition
2,100 100
ANS: a. Beginning net assets + Net income Ending net assets Translation gain (OCI)
HK$ HK$30,000 9,000
Rate $0.16 0.20
$ $ 4,800 1,800 6,600 9,750 $ 3,150
HK$39,000
0.25
HK$ Dr (Cr) HK$ 2,000 13,000 500,000 (476,000) (10,000) (20,000) (250,000) 120,000 121,000 -HK$ 0
Rate $0.25 0.25 0.25 0.25 0.16 0.16 0.20 0.20 0.20 see schedule
b.
Cash, receivables Inventories Plant & equipment, net Liabilities Capital stock Retained earnings, January 1 Sales revenue Cost of goods sold Operating expenses Translation gain (OCI)
c.
(1) Investment in Swire
$ Dr (Cr) $ 500 3,250 125,000 (119,000) (1,600) (3,200) (50,000) 24,000 24,200 (3,150) $ 0
16,000 Cash
16,000
(2) Equity in NI of Swire = [(HK$9,000 – HK$5,000) x $0.20] = $800 Investment in Swire
800 Equity in NI of Swire
(3) Investment in Swire
800
3,150 Equity in OCI of Swire
3,150
The December 31, 2024 investment balance is $16,000 + $800 + $3,150 = $19,950. d.
(C) Equity in NI of Swire Equity in OCI of Swire
800 3,150 Investment in Swire
(E) Capital stock Retained earnings, Jan. 1
1,600 3,200 Investment in Swire
Test Bank, Chapter 7
3,950
4,800
©Cambridge Business Publishers, 2023 7-75
(R) Goodwill (1)
17,500 Investment in Swire (2) Translation gain (OCI)
11,200 6,300
(1) Goodwill = HK$70,000 x $0.25 (2) $11,200 = $19,950 – $3,950 – $4,800
(O) Operating expenses (3) Translation loss (OCI)
1,000 250 Goodwill (4)
1,250
(3) Operating expenses = goodwill impairment loss = HK$5,000 x $0.20 = $1,000 (4) Goodwill reduction = HK$5,000 x $0.25 = $1,250
31.
Topic: Remeasurement and consolidation of an international subsidiary, first year LO 3 Swire Ltd., located in Hong Kong, is a wholly-owned subsidiary of Plato Company, a U.S. company. On January 1, 2024, Plato acquired the voting stock of Swire for HK$312,500 in cash. Swire’s book value was HK$62,500 at the date of acquisition. The HK$250,000 excess of acquisition cost over book value was allocated entirely to goodwill. Plato Company uses the complete equity method to account for its investment in the subsidiary on its own books. It is now December 31, 2024. Goodwill impairment during 2024 was HK$5,000. Exchange rates are as follows: January 1, 2024 Average for 2024 December 31, 2024
$0.16/HK$ $0.20/HK$ $0.25/HK$
Swire’s functional currency is the U.S. dollar. Its trial balances at January 1 and December 31, 2024, in Hong Kong dollars, is below.
Cash, receivables Inventories Plant & equipment, net Liabilities Capital stock Retained earnings, January 1 Sales revenue Cost of goods sold Operating expenses
January 1, 2024 Dr (Cr) HK$ 5,000 23,000 482,500 (448,000) (10,000) (52,500) ---HK$ 0
December 31, 2024 Dr (Cr) HK$ 2,000 13,000 532,500 (326,000) (10,000) (52,500) (400,000) 120,000 121,000 HK$ 0
Additional information: 1. Swire’s ending inventory was purchased when the exchange rate was $0.24/HK$. 2. Plant & equipment of HK$100,000 was purchased at the end of the year. 3. Operating expenses include HK$50,000 on plant & equipment on hand at the beginning of the year. No depreciation was taken on current year purchases. 4. Sales, inventory purchases, and operating expenses other than depreciation were incurred evenly over the year. ©Cambridge Business Publishers, 2023 7-76
Advanced Accounting, 5th Edition
Required a. Calculate Swire’s remeasurement gain or loss for 2024. b. Remeasure Swire’s December 31, 2024 trial balance into U.S. dollars. c. Prepare the journal entries Plato makes on its own books to record the initial investment and recognize Swire’s 2024 net income. d. Present, in journal entry form, the eliminating entries necessary to consolidate the December 31, 2024 trial balances of Plato and Swire. ANS: a. HK$ Rate $ Beginning exposure HK$(443,000) $0.16 $ (70,880) + Sales revenue 400,000 0.20 80,000 - Purchases (110,000) 0.20 (22,000) - Operating expenses (71,000) 0.20 (14,200) - P&E purchases (100,000) 0.25 (25,000) (52,080) Ending exposure HK$(324,000) 0.25 (81,000) Remeasurement loss (income) $ 28,920 b. HK$ $ Dr (Cr) Rate Dr (Cr) Cash, receivables HK$ 2,000 $0.25 $ 500 Inventories 13,000 0.24 3,120 Plant & equipment, net 532,500 (1) 94,200 Liabilities (326,000) 0.25 (81,500) Capital stock (10,000) 0.16 (1,600) Retained earnings, January 1 (52,500) 0.16 (8,400) Sales revenue (400,000) 0.20 (80,000) Cost of goods sold 120,000 (2) 22,560 Operating expenses 121,000 (3) 22,200 Remeasurement loss (income) -see schedule 28,920 HK$ 0 $ 0 (1) [(HK$482,500 – HK$50,000) x $0.16] + (HK$100,000 x $0.25) = $94,200 (2) (HK$23,000 x $0.16) + (HK$110,000 x $0.20) – (HK$13,000 x $0.24) = $22,560 (3) (HK$50,000 x $0.16) + (HK$71,000 x $0.20) = $22,200 c. Investment in Swire
50,000
Cash Investment cost = HK$312,500 x $0.16 = $50,000
50,000
Investment in Swire
6,320
Equity in NI of Swire Equity in NI of Swire = $80,000 - $22,560 - $22,200 - $28,920 = $6,320
6,320
The December 31, 2024 investment balance is $50,000 + $6,320 = $56,320.
Test Bank, Chapter 7
©Cambridge Business Publishers, 2023 7-77
d.
(C) Equity in NI of Swire
6,320 Investment in Swire
6,320
(E) Capital stock Retained earnings, Jan. 1
1,600 8,400 Investment in Swire
10,000
(R) Goodwill
40,000
Investment in Swire Goodwill = HK$250,000 x $0.16 = $40,000
40,000
(O) Operating expenses
800
Goodwill Goodwill impairment loss = HK$5,000 x $0.16 = $800 32.
800
Topic: Translation and consolidation of international subsidiary, first year LO 3 On January 1, 2024, a U.S. parent paid £1,500 to acquire a U.K. subsidiary. The £1,000 excess paid over book value was attributed entirely to goodwill. There is goodwill impairment of £60 in 2024. The subsidiary’s functional currency is the pound sterling. The parent uses the complete equity method to account for its investment in the subsidiary on its own books. The subsidiary’s December 31, 2024 trial balance is below, in pounds sterling: December 31, 2024 trial balance Cash, receivables Inventories, at cost Plant & equipment, net Liabilities Capital stock Retained earnings, beginning Sales revenue Cost of goods sold Operating expenses
Exchange rates ($/£) are:
Required a. b. c.
January 1, 2024 Average for 2024 December 31, 2024
£ Dr (Cr) £ 300 800 2,500 (3,000) (100) (400) (4,000) 2,800 1,100 £ 0 $1.25 1.30 1.35
Prepare a schedule calculating the translation gain for 2024, reported in the subsidiary’s translated trial balance. The consolidation working paper at December 31, 2024 is below. Fill in the working paper as necessary to consolidate the trial balances of the parent and its subsidiary. Prepare a consolidated statement of comprehensive income for 2024.
©Cambridge Business Publishers, 2023 7-78
Advanced Accounting, 5th Edition
Cash, receivables Inventories, at cost Plant & equipment, net Goodwill Investment in subsidiary
Parent Dr (Cr) $ 800 3,500 10,000 -1,982
Subsidiary Dr (Cr) $ 405 1,080 3,375 ---
Liabilities Capital stock Retained earnings, beg Sales revenue Equity in NI of sub Equity in OCI of sub Cost of goods sold Operating expenses Translation gain (OCI) Total
(14,675) (200) (800) (8,000) (52) (55) 6,000 1,500 -$ 0
(4,050) (125) (500) (5,200) --3,640 1,430 (55) $ 0
Dr
Cr
Consol Dr (Cr)
ANS: a. Beginning exposure Changes in exposure: + Net income Ending exposure Translation gain (OCI)
Test Bank, Chapter 7
£ £ 500
Rate $1.25
US $ $ 625
100 _______ £ 600
1.30
130 755 810 $ 55
1.35
©Cambridge Business Publishers, 2023 7-79
b.
Cash, receivables Inventories, at cost Plant & equipment, net Goodwill Investment in subsidiary
Parent Dr (Cr) $ 800 3,500 10,000 -1,982
Subsidiary Dr (Cr) $ 405 1,080 3,375 ---
Liabilities Capital stock Retained earnings, beg Sales revenue Equity in NI of sub Equity in OCI of sub Cost of goods sold Operating expenses Translation gain (OCI) Total
(14,675) (200) (800) (8,000) (52) (55) 6,000 1,500 -$ 0
(4,050) (125) (500) (5,200) --3,640 1,430 (55) $ 0
Dr
Cr
(R) 1,350
81 (O) 107 (C) 625 (E) 1,250 (R)
(E) (E)
125 500
(C) (C)
52 55
(O) (O)
78 3 100 (R) $2,163 $2,163
Consol Dr (Cr) $ 1,205 4,580 13,375 1,269 -(18,725) (200) (800) (13,200) --9,640 3,008 (152) $ 0
c. Consolidated statement of comprehensive income Year ended December 31, 2024 Sales revenue $13,200 Cost of goods sold (9,640) Gross margin 3,560 Operating expenses (3,008) Net income 552 Other comprehensive income (translation gain) 152 Comprehensive income $ 704
©Cambridge Business Publishers, 2023 7-80
Advanced Accounting, 5th Edition
33.
Topic: Translation and consolidation of international subsidiary, first year LO 3 On July 1, 2023, a parent company, located in France, acquired the outstanding shares of a subsidiary located in Hong Kong for HK$20,000 in cash. The entire excess of acquisition cost over the subsidiary’s book value was attributed to goodwill. The subsidiary’s functional currency is the Hong Kong dollar (HK$). The parent company uses the complete equity method to report its investment in the subsidiary on its own books, and the accounting year for both companies ends June 30. The June 30, 2024, trial balances of the parent and subsidiary are below. Parent Dr (Cr) € 4,000 120,000 2,945 (114,700) (2,000) (10,000) (25,000) (24) 79 24,700 € 0
Current assets Plant assets, net Investment in subsidiary Liabilities Capital stock Retained earnings, July 1 Sales revenue Equity in net income of subsidiary Equity in OCL of subsidiary Expenses Total Exchange rates are as follows: July 1, 2023 Average for fiscal 2024 June 30, 2024
Subsidiary Dr (Cr) HK$ 2,000 85,000 -(85,300) (500) (1,000) (8,000) --7,800 HK$ 0
€0.15/HK$ 0.12/HK$ 0.10/HK$
Goodwill arising from this acquisition was not impaired in fiscal 2024. Required a. Translate the subsidiary’s June 30, 2024, trial balance into euros, the presentation currency of its parent. b. Prepare a working paper to consolidate the June 30, 2024, trial balances of the parent and its subsidiary. ANS: a.
Current assets Plant assets, net Liabilities Capital stock Retained earnings, July 1 Sales revenue Expenses Translation loss (OCI) Total
Test Bank, Chapter 7
HK$ Dr (Cr) HK$ 2,000 85,000 (85,300) (500) (1,000) (8,000) 7,800 -HK$ 0
Rate €0.10 0.10 0.10 0.15 0.15 0.12 0.12
€ Dr (Cr) € 200 8,500 (8,530) (75) (150) (960) 936 79 € 0
©Cambridge Business Publishers, 2023 7-81
b.
34.
Current assets Plant assets, net Goodwill Investment in subsidiary
Parent Subsidiary Dr (Cr) Dr (Cr) € 4,000 € 200 120,000 8,500 --2,945 --
Liabilities Capital stock Retained earnings, July 1 Sales revenue Equity in net income of subsidiary Equity in OCL of subsidiary Expenses Translation loss (OCI) Total
(114,700) (2,000) (10,000) (25,000) (24) 79 24,700 -€ 0
(8,530) (75) (150) (960) --936 79 € 0
Dr
Cr
(R)1,850 (C) 55
225 (E) 2,775 (R)
(E) 75 (E) 150 (C)
24 79 (C)
(R) 925 € 3,079
_____ € 3,079
Consol Dr (Cr) € 4,200 128,500 1,850 -(123,230) (2,000) (10,000) (25,960) --25,636 1,004 € 0
Topic: IFRS and U.S. GAAP for highly inflationary country LO 1, 4 A subsidiary of a U.K. parent is located in Venezuela, which is designated as a highly inflationary country. The currency of Venezuela is the bolivar, and the subsidiary’s functional currency is the bolivar. Several years ago the subsidiary purchased land for 1 million bolivar when the price level index was 100 and the exchange rate (£/bolivar) was £1.50. At the end of the current year, the subsidiary still holds the land, and the price level index has risen to 1500, while the exchange rate is £0.105. Required a. Convert the land balance to pounds sterling, following U.S. GAAP. b. Convert the land balance to pounds sterling, following IFRS. ANS: a.
1,000,000 x £1.50 = £ 1,500,000
b.
1,000,000 x (1500/100) x £0.105 = £ 1,575,000
©Cambridge Business Publishers, 2023 7-82
Advanced Accounting, 5th Edition
35.
Topic: IFRS and U.S. GAAP for highly inflationary country LO 1, 4 A parent company, located in the U.K. , has an Argentine subsidiary. The parent’s reporting currency is the pound sterling, and the Argentine subsidiary’s functional currency is the Argentine peso. The subsidiary owns land acquired for 10,000 pesos, when the exchange rate was £0.10/peso. The rate at the end of the current year is £0.008/peso, and the price level index has increased from 100 at the date the land was acquired to 1300 at the end of the current year. The subsidiary’s functional currency is the peso. The parent’s reporting (presentation) currency is the pound sterling. Required a. At what value will the land be reported in the consolidated balance sheet, if the subsidiary’s parent follows IFRS and Argentina is not considered to be a highly inflationary country? At what value will the land be reported in the consolidated balance sheet, if the subsidiary’s parent follows U.S. GAAP and Argentina is not considered to be a highly inflationary country? b. At what value will the land be reported in the consolidated balance sheet, if the subsidiary’s parent follows IFRS and Argentina has been declared a highly inflationary country? c. At what value will the land be reported in the consolidated balance sheet, if the subsidiary’s parent follows U.S. GAAP and Argentina has been declared a highly inflationary country? d. If you answered Parts b. and c. correctly, when hyperinflation exists the land is reported at different amounts depending on if the parent follows U.S. GAAP or IFRS. Under what circumstances will the U.S. GAAP and IFRS amounts be the same? ANS: a.
Using both U.S. GAAP and IFRS, the land is translated into pounds using the current rate: 10,000 x £0.008 = $80
b.
The land is price-level adjusted to pesos of current purchasing power, and then translated into pounds. 10,000 x (1300/100) = 130,000 x £0.008 = $1,040
c.
The land is remeasured into pounds even though the subsidiary’s functional currency is the peso. 10,000 x $0.10 = $1,000
d.
The IFRS and U.S. GAAP amounts will be the same only if the change in the price level and the change in the exchange rate mirror each other. Here, the historical exchange rate is 12.5 times higher than the current rate. If the price-level index similarly changed from 100 to 1250, IFRS and U.S. GAAP would produce the same land value, in pounds: U.S. GAAP: IFRS:
Test Bank, Chapter 7
10,000 x £0.10 = £1,000 10,000 x 1250/100 = 125,000 x £0.008 = £1,000
©Cambridge Business Publishers, 2023 7-83
TEST BANK CHAPTER 8 Foreign Currency Transactions and Hedging MULTIPLE CHOICE 1.
2.
3.
Topic: Import transactions LO 1 How are accounts payable, denominated in another currency, reported on a U.S. company’s balance sheet? a. b. c. d.
At the exchange rate on the balance sheet date At the exchange rate when the payable was originally recorded At the exchange rate when the payables are due The payables are not reported
ANS:
a
Topic: Export transactions LO 1 How are accounts receivable, denominated in another currency, reported on a U.S. company’s balance sheet? a. b. c. d.
At the rate on the balance sheet date At the rate when the receivable was originally recorded At the rate when the customer pays the company the receivables are not reported
ANS:
a
Topic: Import transactions LO 1 A U.S. company buys inventory from a supplier in Canada and pays for the inventory in Canadian dollars (C$). The inventory is converted to U.S. dollars on the U.S. company’s balance sheet using what $/C$ exchange rate? a. b. c. d.
The rate when the inventory was paid for The rate at the balance sheet date The rate when the inventory was delivered The rate when the inventory is sold
ANS:
c
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-1
4.
5.
Topic: Export transactions LO 1 A U.S. company sells merchandise to customers in Hong Kong. The merchandise is priced in Hong Kong dollars, and customers generally take 15 days to pay for the merchandise. The U.S. company’s sales revenue for these sales, reported on its income statement, is expressed in U.S. dollars converted at: a. b. c. d.
The rate when the company received payment from the customer The rate when the sales were made The rate at the end of the accounting year The rate when the company received the purchase order from the customer
ANS:
b
Topic: Export transactions LO 1 On November 15, 2023, when the spot rate is $0.14/HK$, a U.S. company sells merchandise priced at HK$1,000,000 to a customer in Hong Kong. The spot rate is $0.135 on December 31, the company’s year-end. Payment of HK$1,000,000 is received from the customer on February 1, 2024, when the spot rate is $0.132. What exchange gains and losses are reported in 2023 and 2024 income? a. b. c. d. ANS:
6.
2023 $5,000 exchange loss $5,000 exchange gain No effect No effect
2024 $3,000 exchange loss $3,000 exchange gain $8,000 exchange gain $8,000 exchange loss
a 2023 exchange loss = ($0.14 – $0.135) x HK$1,000,000 = $5,000 2024 exchange loss = ($0.135 – $0.132) x HK$1,000,000 = $3,000
Topic: Import transactions LO 1 On November 15, 2023, when the spot rate is $0.14/HK$, a U.S. company takes delivery of merchandise priced at HK$1,000,000 from a supplier in Hong Kong. The spot rate is $0.135 on December 31, the company’s year-end. Payment of HK$1,000,000 is made to the supplier on February 1, 2024, when the spot rate is $0.132. What is the effect of exchange gains and losses on 2023 and 2024 income? a. b. c. d. ANS:
2023 $5,000 exchange loss $5,000 exchange gain No effect No effect
2024 $3,000 exchange loss $3,000 exchange gain $8,000 exchange gain $8,000 exchange loss
b 2023 exchange gain = ($0.14 – $0.135) x HK$1,000,000 = $5,000 2024 exchange gain = ($0.135 – $0.132) x HK$1,000,000 = $3,000
©Cambridge Business Publishers, 2023 8-2
Advanced Accounting, 5th Edition
7.
Topic: Export transactions LO 1 On November 15, 2023, when the spot rate is $0.12/HK$, a U.S. company sells merchandise priced at HK$1,000,000 to a customer in Hong Kong. The spot rate is $0.128 on December 31, the company’s year-end. Payment of HK$1,000,000 is received from the customer on February 1, 2024, when the spot rate is $0.123. What exchange gains and losses are reported in 2023 and 2024 income? a. b. c. d. ANS:
8.
2023 $8,000 exchange loss $8,000 exchange gain No effect No effect
2024 $5,000 exchange gain $5,000 exchange loss $3,000 exchange gain $3,000 exchange loss
b 2023 exchange gain = ($0.128 – $0.12) x HK$1,000,000 = $8,000 2024 exchange loss = ($0.128 – $0.123) x HK$1,000,000 = $5,000
Topic: Import transactions LO 1 On November 15, 2023, when the spot rate is $0.12/HK$, a U.S. company takes delivery of merchandise priced at HK$1,000,000 from a supplier in Hong Kong. The spot rate is $0.128 on December 31, the company’s year-end. Payment of HK$1,000,000 is made to the supplier on February 1, 2024, when the spot rate is $0.123. What is the effect of exchange gains and losses on 2023 and 2024 income? a. b. c. d. ANS:
2023 $8,000 exchange loss $8,000 exchange gain No effect No effect
2024 $5,000 exchange gain $5,000 exchange loss $3,000 exchange gain $3,000 exchange loss
a 2023 exchange loss = ($0.128 – $0.12) x HK$1,000,000 = $8,000 2024 exchange gain = ($0.128 – $0.123) x HK$1,000,000 = $5,000
Use the following data to answer Questions 9 – 11. On November 30, 2023, a U.S. company purchased merchandise on credit from a Swiss supplier at an invoice price of CHF1,000, when the exchange rate was $1.08/CHF. On December 31, 2023, the company’s year-end, the exchange rate was $1.09/CHF. On February 1, 2024, the company purchased the CHF1,000 for $1.086/CHF and paid the invoice. On March 15, 2024, when the exchange rate was $1.083, the company sold the merchandise to a U.S. customer for $2,000.
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-3
9.
10.
11.
Topic: Import transactions LO 1 At what amount should the merchandise be reported on the U.S. company’s December 31, 2023 balance sheet? a. b. c. d.
$1,090 $1,086 $1,083 $1,080
ANS:
d CHF1,000 x $1.08 = $1,080
Topic: Import transactions LO 1 What is the U.S. company’s gross margin (sales revenue minus cost of sales) on the March 15, 2024 sale? a. b. c. d.
$917 $914 $920 $910
ANS:
c Cost of goods sold = $1,080, unaffected by changes in rates subsequent to purchase. $2,000 – $1,080 = $920
Topic: Import transactions LO 1 The U.S. company’s exchange gain or loss for 2024 is: a. b. c. d.
$4 gain $6 loss $4 loss $7 gain
ANS:
a ($1.09 – $1.086) x CHF1,000 = $4 gain
Use the following data to answer Questions 12 – 14. On October 25, 2023, a U.S. company sold merchandise on credit to a customer in Spain at an invoice price of €1,000, when the exchange rate was $1.12/€. On December 31, 2023, the U.S. company’s yearend, the exchange rate was $1.115/€. On February 1, 2024, when the exchange rate was €1.119, the U.S. company received €1,000 in payment for the merchandise.
©Cambridge Business Publishers, 2023 8-4
Advanced Accounting, 5th Edition
12.
13.
14.
Topic: Export transaction LO 1 The U.S. company’s exchange gain or loss for 2023 is a. b. c. d.
$5 gain $1 loss $1 gain $5 loss
ANS:
d ($1.12 - $1.115) x €1,000 = $5 loss
Topic: Export transaction LO 1 In 2023, the U.S. company reports sales revenue of a. b. c. d.
$1,119 $1,120 $1,115 $1,000
ANS:
b $1.12 x €1,000 = $1,120
Topic: Export transaction LO 1 The U.S. company’s exchange gain or loss for 2024 is a. b. c. d.
$4 loss $1 loss $4 gain $1 gain
ANS:
c ($1.119 - $1.115) x €1,000 = $4 gain
Use the following information to answer Questions 15 – 17. On May 20, when the exchange rate was $1.35/£, a U.S. company purchased merchandise from a U.K. supplier for £10,000 and paid for the merchandise on June 5, when the exchange rate was $1.38/£. On August 15, when the exchange rate was $1.13/€, the U.S. company sold the merchandise to a customer in Belgium at an invoice price of €16,000. On September 6, when the exchange rate was $1.15/€, the U.S. company received payment of €16,000 from the Belgian customer. The U.S. company’s accounting year ends December 31.
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-5
15.
16.
17.
Topic: Import and export transactions LO 1 The U.S. company reports sales revenue in the amount of: a. b. c. d.
$18,400 $18,080 $16,000 $21,600
ANS:
b €16,000 x $1.13 = $18,080
Topic: Import and export transactions LO 1 What amount does the U.S. company report as cost of goods sold? a. b. c. d.
$13,800 $10,000 $13,500 $11,300
ANS:
c £10,000 x $1.35 = $13,500
Topic: Import and export transactions LO 1 What is the U.S. company’s net exchange gain or loss for the year? a. b. c. d.
$20 gain $20 loss $620 loss $620 gain
ANS:
a £10,000 x ($1.35 - $1.38) = $300 loss on accounts payable €16,000 x ($1.15 - $1.13) = $320 gain on accounts receivable Net effect = $20 gain
Use the following information to answer Questions 18 – 20. On October 31, 2023, when the exchange rate was $0.75/S$, a U.S. company purchased merchandise from a Singapore supplier for S$10,000, and paid for the merchandise on January 15, 2024, when the exchange rate was $0.745/S$. On November 15, 2023, when the exchange rate was $0.80/C$, the U.S. company sold the merchandise to a customer in Canada at an invoice price of C$20,000. On January 31, 2024, when the exchange rate was $0.815/C$, the U.S. company received payment of C$20,000 from the Canadian customer. The U.S. company’s accounting year ends December 31. The exchange rates at December 31, 2023, were $0.76/S$ and $0.78/C$.
©Cambridge Business Publishers, 2023 8-6
Advanced Accounting, 5th Edition
18.
19.
20.
21.
Topic: Import and export transactions LO 1 For 2023, the U.S. company reports an exchange gain or loss of: a. b. c. d.
$500 gain $500 loss $300 loss $0
ANS:
b S$10,000 x ($0.76 - $0.75) = $100 loss on accounts payable C$20,000 x ($0.80 - $0.78) = $400 loss on accounts receivable
Topic: Import and export transactions LO 1 For 2024, the U.S. company reports an exchange gain or loss of: a. b. c. d.
$850 loss $550 gain $350 loss $850 gain
ANS:
d S$10,000 x ($0.76 - $0.745) = $150 gain on accounts payable C$20,000 x ($0.815 - $0.78) = $700 gain on accounts receivable
Topic: Import and export transactions LO 1 What gross margin on the sale of merchandise does the U.S. company report in 2023? a. b. c. d.
$8,100 $8,400 $8,500 $10,000
ANS:
c ($C20,000 x $0.80) – ($S10,000 x $0.75) = $8,500 gross margin
Topic: Foreign currency borrowing LO 1 A U.S. company borrows €100,000 by issuing bonds to German investors when the spot rate is $1.25/€. The interest rate is 3 percent per annum. Which of the following is false concerning the U.S. company’s accounting for this loan? a. b. c. d.
If the euro weakens against the U.S. dollar there will be an exchange loss on the bonds payable. If the spot rate falls to $1.20/€ one year later, when the interest payment is accrued, the interest expense will be recorded at $3,600. The company can hedge these bonds by entering a forward purchase contract for euros. If the spot rate falls to $1.23 one year later, the company will report the bonds payable at $123,000.
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-7
ANS: 22.
a
Topic: Foreign currency borrowing LO 1 Interest expense on a loan denominated in another currency is converted at: a. b. c. d.
The average spot rate for the period the interest covers The spot rate when the loan was made The spot rate when the interest is accrued The forward rate for delivery when the interest must be paid
ANS:
c
Use the following information to answer Questions 23 and 24. A U.S. company purchases a 90-day certificate of deposit from a Singapore bank on May 15, when the spot rate is $0.72/S$, for its face value of S$100,000. The certificate pays interest at an annual rate of 2 percent. On August 13, the certificate of deposit matures, and the company receives principal and interest of S$100,500 and records interest revenue on the investment. The spot rate on August 13 is $0.75/S$. The average spot rate for the period May 15 – August 13 is $0.73/S$. The company’s accounting year ends December 31. 23.
24.
Topic: Foreign currency lending LO 1 The total exchange gain or loss on this investment is: a. b. c. d.
$3,000 gain $3,000 loss $2,000 loss $2,000 gain
ANS:
a S$100,000 x ($0.75 – $0.72) = $3,000 gain
Topic: Foreign currency lending LO 1 Interest income on the investment is reported at: a. b. c. d.
$500 $360 $375 $365
ANS:
c S$500 x $0.75 = $375
©Cambridge Business Publishers, 2023 8-8
Advanced Accounting, 5th Edition
Use the following information to answer Questions 25 – 28. A U.S. company purchases a 3-month certificate of deposit from a Singapore bank at its face value of S$100,000 on December 1, 2023, when the spot rate is $0.72/S$. The certificate pays interest at an annual rate of 3 percent. On December 31, the company’s year-end, the spot rate is $0.70/S$. On March 1, when the spot rate is $0.66/S$, the certificate of deposit matures, and the company receives principal and interest of S$100,750. 25.
26.
27.
Topic: Foreign currency lending LO 1 What amount does the company report as interest revenue for 2023? a. b. c. d.
$175 $180 $250 $360
ANS:
a (S$100,000 x 3% x 1/12) x $0.70 = $175
Topic: Foreign currency lending LO 1 At what amount does the company report the principal amount of its notes receivable at December 31, 2023? a. b. c. d.
$ 70,000 $ 72,000 $ 66,000 $100,000
ANS:
a S$100,000 x x $0.70 = $70,000
Topic: Foreign currency lending LO 1 What is the company’s exchange loss for 2024? a. b. c. d.
$4,000 $4,010 $4,020 $4,030
ANS:
b S$100,000 x ($0.70 - $0.66) = $4,000 loss on the note receivable S$250 x ($0.70 - $0.66) = $10 loss on interest receivable
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-9
28.
29.
30.
31.
Topic: Foreign currency lending LO 1 At what total amount does the company debit cash when the note matures? a. b. c. d.
$72,540 $66,000 $66,540 $66,495
ANS:
d S$100,750 x $0.66 = $66,495
Topic: Financial derivatives: forward contracts LO 1 A U.S. company has a forward purchase contract for delivery of euros at the end of May at a price of $1.14/€. The U.S. dollar weakens against the euro during this period. The company will: a. b. c. d.
Gain on the forward purchase contract Lose on the forward purchase contract Not exercise the forward purchase contract Continue to hold the forward contract after the end of May
ANS:
a
Topic: Financial derivatives: forward contracts LO 1 A U.S. company has a forward sale contract for delivery of euros at the end of May at a price of $1.14/€. The U.S. dollar weakens against the euro during this period. The company will: a. b. c. d.
Gain on the forward sale contract Lose on the forward sale contract Not exercise the forward sale contract Continue to hold the forward contract after the end of May
ANS:
b
Topic: Financial derivatives: options LO 1 A U.S. company holds put options in euros with a strike price of $1.15/€. The spot price of euros increases to $1.17/€. The company will: a. b. c. d.
Gain on the put options Exercise the put options Lose on the put options Continue to hold the options after they expire
ANS:
c
©Cambridge Business Publishers, 2023 8-10
Advanced Accounting, 5th Edition
32.
33.
34.
35.
Topic: Foreign currency options LO 1 A company holds put options for €1,000 with a strike price of $1.15/€, purchased for $20. The exchange rate increases to $1.18/€. The company a. b. c. d.
Loses $50 on the put options Loses $20 on the options Gains $10 on the put options Gains $30 on the put options
ANS:
b The put options are not exercised since the market rate is above the strike price.
Topic: Foreign currency options LO 1 A company holds put options for €1,000 with a strike price of $1.15/€, purchased for $20. The exchange rate declines to $1.12/€. The company a. b. c. d.
Loses $50 on the put options Loses $20 on the options Gains $10 on the put options Gains $30 on the put options
ANS:
c [($1.15 - $1.12) x €1,000] - $20 = $10 gain
Topic: Financial derivatives LO 1 You believe the U.S. dollar will significantly weaken against the euro in the future. Which position will allow you to benefit from your information? a. b. c. d.
Put option in euros Futures contract to buy euros Forward sale of euros Loan payable denominated in euros
ANS:
b
Topic: Financial derivatives LO 1 You have inside information that the U.S. dollar will significantly strengthen against the yuan in the future. Which position will allow you to benefit from your information? a. b. c. d.
Futures contract to buy yuan Call option in yuan You don’t take a position because expected losses exceed expected gains. Futures contract to sell yuan
ANS:
d
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-11
36.
37.
38.
Topic: Valuation of forward contracts LO 1 On November 1, 2023, a U.S. company invests in a forward sale contract for delivery of 1,000,000 Singapore dollars (S$) at $0.735/S$ on February 1, 2024. The spot rate on November 1 is $0.74/S$. At December 31, the end of the accounting year, the forward contract is still outstanding. The year-end spot rate is $0.755. The year-end forward rate for February 1 delivery of Singapore dollars is $0.75. How is the forward contract reported on the U.S. company’s year-end balance sheet? a. b. c. d.
$13,000 asset $15,000 liability $20,000 asset $10,000 liability
ANS:
b ($0.75 – $0.735) x S$1,000,000 = $15,000 A forward sale is a liability when the current sale price for the same delivery date is above the contract price.
Topic: Valuation of forward contracts LO 1 On November 1, 2023, a U.S. company invests in a forward purchase contract for delivery of 1,000,000 Singapore dollars (S$) at $0.735/S$ on February 1, 2024. The spot rate on November 1 is $0.74/S$. At December 31, the end of the accounting year, the forward contract is still outstanding. The year-end spot rate is $0.755. The year-end forward rate for February 1 delivery of Singapore dollars is $0.75. How is the forward contract reported on the U.S. company’s yearend balance sheet? a. b. c. d.
$13,000 asset $10,000 liability $20,000 asset $15,000 asset
ANS:
d ($0.75 – $0.735) x S$1,000,000 = $15,000 A forward purchase is an asset when the current purchase price for the same delivery date is above the contract price.
Topic: Hedge of foreign-currency-denominated receivable LO 2 A U.S. company has euro-denominated receivables that it hedges with a forward sale of euros. The U.S. dollar weakens against the euro. Which statement is true? a. b. c. d. ANS:
The gain on the receivables and the loss on the forward are reported in income. The gain on the receivables and the loss on the forward are reported in other comprehensive income. The loss on the receivables and the gain on the forward are reported in income. The loss on the receivables and the gain on the forward are reported in other comprehensive income. a
©Cambridge Business Publishers, 2023 8-12
Advanced Accounting, 5th Edition
39.
Topic: Hedge of foreign-currency-denominated payable LO 2 A U.S. company has payables denominated in euros that it hedges with foreign currency forward purchase contracts. The U.S. dollar strengthens against the euro. Which statement is true? a. b. c. d. ANS:
40.
41.
The gain on the payables and the loss on the forward are reported in income. The gain on the payables and the loss on the forward are reported in other comprehensive income. The loss on the payables and the gain on the forward are reported in income. The loss on the payables and the gain on the forward are reported in other comprehensive income. a
Topic: Hedge of export transaction LO 2 A U.S. company has customers in Singapore, who remit payments to the U.S. company in Singapore dollars. Which investment hedges the exchange risk associated with these customers? a. b. c. d.
Forward purchase in Singapore dollars Forward sale in Singapore dollars Long futures in Singapore dollars Call option in Singapore dollars
ANS:
b
Topic: Hedge of export transaction LO 2 A U.S. company has suppliers in Singapore, who require payment in Singapore dollars. Which investment hedges the exchange risk associated with these suppliers? a. b. c. d.
Forward purchase in Singapore dollars Forward sale in Singapore dollars Short futures in Singapore dollars Put option in Singapore dollars
ANS:
a
Use the following information on the U.S. dollar value of the euro to answer Questions 42 – 46.
November 16, 2023 December 31, 2023 March 16, 2024
Spot Rate $ 1.15 1.14 1.13
Forward Rate for March 16, 2024 Delivery $ 1.148 1.135 1.130
On November 16, 2023, a U.S. company makes a sale to a customer in Germany. Under the sale terms, the customer will pay the company €100,000 on March 16. On November 16, the company also enters a forward contract to sell €100,000 on March 16, 2024. On March 16, the company receives €100,000 from the customer and sells it using the forward contract. The company’s accounting year ends December 31. Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-13
42.
43.
44.
45.
Topic: Hedge of export transaction LO 2 How will the company report the forward contract on its December 31, 2023 balance sheet? a. b. c. d.
$1,300 asset $1,300 liability $800 asset $800 liability
ANS:
a €100,000 x ($1.148 – $1.135) = $1,300 asset
Topic: Hedge of export transaction LO 2 What is the net effect on 2023 income of exchange rate changes due to the sale and the forward contract? a. b. c. d.
no effect $300 net loss $300 net gain $200 net loss
ANS:
c Forward contract: ($1.148 – $1.135) x €100,000 = $1,300 gain Receivable: ($1.15 – $1.14) x €100,000 = $1,000 loss
Topic: Hedge of export transaction LO 2 At what amount will the company report sales revenue on its 2023 income statement? a. b. c. d.
$114,800 $114,000 $113,500 $115,000
ANS:
d €100,000 x $1.15 = $115,000
Topic: Hedge of export transaction LO 2 What is the net effect on 2024 income of exchange rate changes due to the sale and the forward contract? a. b. c. d.
no effect $500 net loss $500 net gain $1,500 net gain
©Cambridge Business Publishers, 2023 8-14
Advanced Accounting, 5th Edition
ANS:
46.
b Forward contract: ($1.135 – $1.13) x €100,000 = $500 gain Receivable: ($1.14 – $1.13) x €100,000 = $1,000 loss
Topic: Hedge of export transaction LO 2 How much in U.S. dollars does the U.S. company receive on March 16, 2024? a. b. c. d.
$100,000 $115,000 $113,000 $114,800
ANS:
d €100,000 x $1.148 = $114,800
Use the following information on the U.S. dollar value of the pound sterling to answer Questions 47 – 51.
May 16, 2024 June 30, 2024 August 16, 2024
Spot Rate $1.380 1.390 1.400
Forward Rate for August 16, 2024 Delivery $1.375 1.388 1.400
On May 16, 2024, a U.S. company takes delivery of £100,000 in merchandise from a U.K. supplier. The company will pay the supplier £100,000 on August 16. On May 16, the company also enters a forward contract to buy £100,000 on August 16, 2024. On August 16, the company purchases £100,000 using the forward contract, and pays the supplier. The company’s accounting year ends June 30, and it sells the merchandise in September 2024. 47.
Topic: Hedge of import transaction LO 2 How will the company report the forward contract on its June 30, 2024 balance sheet? a. b. c. d.
$1,000 asset $1,000 liability $1,300 asset $1,300 liability
ANS:
c £100,000 x ($1.388 – $1.375) = $1,300 asset
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-15
48.
49.
50.
51.
Topic: Hedge of import transaction LO 2 What is the net effect on fiscal 2024 income of exchange rate changes due to the merchandise purchase and the forward contract? a. b. c. d.
no effect $2,300 net loss $300 net loss $300 net gain
ANS:
d Forward contract: ($1.388 – $1.375) x £100,000 = $1,300 gain Payable: ($1.39 – $1.38) x £100,000 = $1,000 loss
Topic: Hedge of import transaction LO 2 At what amount will the company report cost of goods sold for the sale of the merchandise in fiscal 2025? a. b. c. d.
$138,000 $140,000 $137,500 $139,000
ANS:
a £100,000 x $1.38 = $138,000
Topic: Hedge of import transaction LO 2 What is the net effect on fiscal 2025 income of exchange rate changes due to the merchandise purchase and the forward contract? a. b. c. d.
no effect $200 net gain $200 net loss $2,200 net gain
ANS:
b Forward contract: ($1.40 – $1.388) x £100,000 = $1,200 gain Payable: ($1.40 – $1.39) x £100,000 = $1,000 loss
Topic: Hedge of import transaction LO 2 How much in U.S. dollars does the U.S. company pay for the £100,000 on August 16, 2024? a. b. c. d.
$100,000 $138,000 $137,500 $140,000
©Cambridge Business Publishers, 2023 8-16
Advanced Accounting, 5th Edition
ANS: 52.
c £100,000 x $1.375 = $137,500
Topic: Hedge of import transaction LO 2 A U.S. company uses forward contracts to hedge its euro-denominated purchases of merchandise imported from an Irish supplier. Assume the spot rate is $1.16/€ and the appropriate forward rate is $1.165 when the merchandise is delivered, and the company enters the forward contract. The spot rate is $1.18 when the forward contract comes due and the company pays the supplier. Which statement is true? a. b. c. d. ANS:
53.
The loss on the forward and the gain on the payable to the supplier appear on the company’s income statement, with a net positive impact on income. The gain on the forward and the loss on the payable to the supplier appear on the company’s income statement, with a net negative effect on income. The loss on the forward and the gain on the payable to the supplier are reported in the company’s OCI, with a net positive impact on OCI. The loss on the forward and the gain on the payable to the supplier are reported in the company’s OCI, with no net impact on OCI. b The gain on the forward is ($1.18 - $1.165) = $0.015/€, and the loss on the payable is ($1.18 - $1.16) = $0.020/€, for a net loss of $0.005/€, reported in income.
Topic: Hedge of foreign currency-denominated receivables LO 2 To achieve matching of hedge gains and losses against losses and gains on the hedged item, accounting for hedges of receivables denominated in foreign currency: a. b. c. d.
Uses hedge accounting for the hedge, but not the receivable Uses hedge accounting for the receivable, but not the hedge Uses hedge accounting for both the hedge and the receivable Does not use hedge accounting for either the hedge or the receivable
ANS:
d
Use the following information on the U.S. dollar value of the New Zealand dollar to answer Questions 54 - 56.
March 28 May 2 June 28
Spot Rate $0.670 0.680 0.685
Forward Rate for June 30 Delivery $0.675 0.682 0.685
On March 28, a U.S. company issues a purchase order to buy merchandise for NZ$100,000. The company will pay the supplier on June 28. On March 28, the company enters a forward contract to purchase NZ$100,000 on June 28. The company takes delivery of the merchandise on May 2. On June 28, the company acquires NZ$100,000 using the forward contract and pays the supplier. The company sells the merchandise later in the year. The company’s accounting year ends December 31. Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-17
54.
55.
56.
Topic: Hedge of firm purchase commitment LO 3 When the merchandise is sold by the U.S. company, cost of goods sold is: a. b. c. d.
$68,500 $68,700 $68,000 $67,300
ANS:
d (NZ$100,000 x $0.68) – (NZ$100,000 x ($0.682 – $0.675)) = $67,300
Topic: Hedge of firm purchase commitment LO 3 When the company takes delivery of the merchandise on May 2, accounts payable is credited in the amount of: a. b. c. d.
$67,000 $67,500 $68,000 $68,200
ANS:
c $0.68 x NZ$100,000 = $68,000
Topic: Hedge of firm purchase commitment LO 3 What is the net effect of exchange rate changes due to the merchandise purchase and hedge on the year’s income? a. b. c. d.
no effect $200 loss $900 loss $500 gain
ANS:
b The gain on the hedge and the loss on the firm commitment cancel out. For the period May 2 – June 28, the gain on the forward contract is ($0.685 - $0.682) x NZ$100,000 = $300 and the loss on the payable is ($0.685 - $0.68) x NZ$100,000 = $500, for a net loss of $200.
©Cambridge Business Publishers, 2023 8-18
Advanced Accounting, 5th Edition
Use the following information on the U.S. dollar value of the euro to answer Questions 57 and 58.
October 30, 2023 November 1, 2023 December 31, 2023 April 30, 2024
Spot Rate $ 1.130 1.148 1.160 1.170
Forward Rate for April 30, 2024 Delivery $ 1.140 1.145 1.165 1.170
On October 30, 2023, a U.S. company receives a purchase order from a customer in Spain. Under the sale terms, the customer will pay the company €100,000 on April 30, 2024. On October 30, the U.S. company also enters a forward contract to sell €100,000 on April 30, 2024. The company delivers the merchandise to the customer on November 1. On April 30, the company receives €100,000 from the customer and sells it using the forward contract. The company’s accounting year ends December 31. 57.
58.
Topic: Hedge of firm sale commitment LO 3 On November 1, 2023, the company reports sales revenue in the amount of: a. b. c. d.
$114,300 $114,500 $114,800 $115,300
ANS:
a (€100,000 x $1.148) – (($1.145 – $1.140) x €100,000) = $114,300
Topic: Hedge of firm sale commitment LO 3 What net gain or loss is recognized in 2023, in addition to sales revenue? a. b. c. d.
$500 net loss $500 net gain $800 net loss $800 net gain
ANS:
c The gain and loss for the firm commitment period cancel out. Gain on receivable = ($1.160 – $1.148) x €100,000 = $1,200 Loss on forward = ($1.165 – $1.145) x €100,000 = $2,000
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-19
59.
60.
61.
Topic: Hedge of firm purchase commitment LO 3 A U.S. company issues a purchase order for merchandise to a Canadian supplier. The agreed upon total price is C$100,000, and the current spot rate is $0.82/C$. The company enters a forward contract when the purchase order is issued, at a rate of $0.815/C$, for delivery when the merchandise is received. If the spot rate falls to $0.80/C$ when the merchandise is received and paid for, at what value will the merchandise be reported on the company’s books? a. b. c. d.
$80,000 $78,500 $82,000 $81,500
ANS:
d ($0.80 x C$100,000) + (($0.815 - $0.80) x C$100,000) = $81,500
Topic: Hedge of firm purchase commitment LO 3 On July 10, a U.S. company with a December 31 year-end enters a forward contract that locks in the purchase price of won, for delivery on August 15. The forward contract hedges a firm commitment to buy merchandise from a supplier in Korea, with payment denominated in won. The purchase is made on August 1, and payment is made on August 15. The U.S. company sells the merchandise in September. Where is the value of the firm commitment to purchase reported in the year-end financial statements? a. b. c. d.
Asset or liability on the balance sheet Increase or decrease in other comprehensive income Adjustment to sales revenue Adjustment to cost of goods sold
ANS:
d
Topic: Hedge of firm purchase commitment LO 3 To achieve matching of hedge gains and losses against losses and gains on the hedged item, accounting for qualified hedges of firm purchase commitments denominated in foreign currency: a. b. c. d.
Uses hedge accounting for the firm commitment, but not the hedge Uses hedge accounting for the hedge, but not the firm commitment Uses hedge accounting for both the hedge and the firm commitment Does not use hedge accounting for either the hedge or the firm commitment
ANS:
a
©Cambridge Business Publishers, 2023 8-20
Advanced Accounting, 5th Edition
Use the following information to answer Questions 62 and 63. A U.S. company anticipates that it will sell merchandise for €100,000 at the end of August and receive payment for it at the end of October. On May 1, when the spot rate is $1.10/€ and the forward rate for delivery on October 31 is $1.11/€, the company enters a forward contract to sell €100,000 on October 31. The forward contract qualifies as a cash flow hedge of the forecasted sale. The company sells the merchandise on August 30, when the spot rate is $1.132/€ and the forward rate for October 31 delivery is $1.13/€ and receives payment of €100,000 and closes the forward contract on October 31, when the spot rate is $1.14/€. The company has a December 31 year-end. 62.
63.
Topic: Hedge of forecasted sale LO 4 Sales revenue is reported on the company’s income statement in the amount of: a. b. c. d.
$113,200 $111,200 $113,000 $115,200
ANS:
b Changes in the value of the forward contract remain in other comprehensive income until the date of sale, when they are reclassified as an adjustment to sales revenue. ($1.13 – $1.11) x €100,000 = $2,000 loss in OCI is reclassified as a reduction in sales revenue of $1.132 x €100,000 = $113,200. Net sales revenue is $111,200.
Topic: Hedge of forecasted sale LO 4 What is the net exchange gain/loss for the year related to this transaction? a. b. c. d.
$-0$200 net gain $200 net loss $1,800 net loss
ANS:
c Exchange gains and losses are reported on the receivable and the forward contract for August 30 through October 31. ($1.14 – $1.132) x €100,000 = $800 gain on receivable ($1.14 – $1.13) x €100,000 = $1,000 loss on the forward contract
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-21
Use the following information to answer Questions 64 - 66. A U.S. company anticipates that it will purchase merchandise for €100,000 at the end of August and pay for it at the time the merchandise is delivered. On May 1, when the spot rate is $1.10/€ and the forward rate for delivery on August 30 is $1.11/€, the company enters a forward contract to buy €100,000 on August 30. The forward contract qualifies as a cash flow hedge of the forecasted purchase. The company purchases the merchandise on August 30, when the spot rate is $1.132/€, and closes the forward contract and pays the supplier €100,000. The company sells the merchandise in October. The company has a December 31 year-end. 64.
65.
66.
Topic: Hedge of forecasted purchase LO 4 On August 30, the company records the merchandise at what amount? a. b. c. d.
$113,200 $111,000 $115,400 $110,000
ANS:
a Changes in the value of the forward contract remain in other comprehensive income until the merchandise is sold. Therefore, the merchandise is recorded at the spot rate at the date of purchase, $1.132 x €100,000 = $113,200.
Topic: Hedge of forecasted purchase LO 4 As of August 30, the effect of the above events on other comprehensive income is: a. b. c. d.
$0 $2,200 net gain $2,200 net loss $3,200 net gain
ANS:
b The value of the forward contract increases by ($1.132 – $1.11) x €100,000 = $2,200 during the period May 1 – August 30. This gain is reported in other comprehensive income until the merchandise is sold.
Topic: Hedge of forecasted purchase LO 4 At what amount is cost of goods sold reported when the company sells the merchandise in October? a. b. c. d.
$113,200 $111,000 $115,400 $110,000
ANS:
b The $2,200 gain is reclassified from AOCI as a reduction in cost of goods sold. $113,200 $2,200 = $111,000.
©Cambridge Business Publishers, 2023 8-22
Advanced Accounting, 5th Edition
Use the following information on the U.S. dollar value of the euro to answer Questions 67 and 68.
October 30, 2023 December 31, 2023 April 30, 2024
Spot Rate $ 1.150 1.158 1.160
Forward Rate for April 30, 2024 Delivery $ 1.154 1.156 1.160
On October 30, 2023, a U.S. company forecasts that it will purchase merchandise from an Italian supplier at the end of April 2024, in the amount of €100,000, and will pay the supplier on delivery. On October 30, the company enters a forward contract to buy €100,000 on April 30, 2024 and classifies it as a cash flow hedge of the forecasted purchase. On April 30, 2024, the company receives the merchandise, closes the forward contract and pays the supplier. The company’s accounting year ends December 31. 67.
68.
Topic: Hedge of forecasted purchase LO 4 On December 31, 2023, how is the change in value of the forward contract reported? a. b. c. d.
$200 gain, reported in income $200 gain, reported in other comprehensive income $600 loss, reported in income $600 loss, reported in other comprehensive income
ANS:
b ($1.156 – $1.154) x €100,000 = $200 gain, classified in other comprehensive income until the merchandise is sold.
Topic: Hedge of forecasted purchase LO 4 When the merchandise is sold by the company, what is the cost of goods sold? a. b. c. d.
$116,600 $116,000 $115,000 $115,400
ANS:
d (€100,000 x $1.16) - (($1.16 – $1.154) x €100,000) = $115,400
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-23
69.
Topic: Hedge of forecasted purchase LO 4 A U.S. company reports a forward contract as a cash flow hedge of a forecasted purchase of merchandise, payment to be made in Hong Kong dollars. How is hedge accounting used in this situation? a. b.
d.
Hedge accounting is used for both the forecasted purchase and the forward contract. Hedge accounting is used for the forecasted purchase. The forward contract is reported normally. Hedge accounting is used for the forward contract. The forecasted purchase is reported normally. Normal accounting is used for both the forecasted purchase and the forward contract.
ANS:
c
c.
70.
Topic: Hedge of forecasted sale LO 4 A U.S. company reports a forward contract as a cash flow hedge of a forecasted sale of merchandise to a U.K. customer, payment to be received in pounds sterling. When are gains and losses on the forward contract reported in income? a. b. c. d.
When the customer pays for the merchandise When the anticipated sale becomes a firm commitment As the market value of the hedge investment changes When the U.S. company reports sales revenue on the sale
ANS:
d
Use the following information to answer Questions 71 and 72. A U.S. company that has invested in forward contracts to hedge its sales to customers in the U.K. reports $100,000 of losses on these contracts in accumulated other comprehensive income. 71.
Topic: Hedges of forecasted sales LO 4 The accumulated losses reported in the company’s AOCI are the result of a. b. c. d.
an increase in the $/£ exchange rate for forecasted sales to U.K. customers. a decrease in the $/£ exchange rate for forecasted sales to U.K. customers. an increase in the $/£ exchange rate for firm commitments to sell to U.K. customers. a decrease in the $/£ exchange rate for firm commitments to sell to U.K. customers.
ANS:
a
©Cambridge Business Publishers, 2023 8-24
Advanced Accounting, 5th Edition
72.
73.
74.
75.
Topic: Discontinuance of hedge accounting LO 4 The company determines that the forward contracts no longer qualify for hedge accounting. As a result, the company will transfer the losses from its AOCI a. b. c. d.
immediately to retained earnings as a retroactive adjustment. immediately to expenses/losses on the income statement. to expenses/losses on the income statement when the sales are made. to expenses/losses when the forward contracts are closed.
ANS:
b
Topic: Hedge of investment in an international subsidiary LO 5 Hedge accounting is not used for hedges of remeasured subsidiaries because: a. b. c. d.
It is specifically prohibited in ASC Topic 815. The hedges do not meet the strict requirements for effective hedges. There is no risk to hedge. Normal accounting matches gains and losses in the same period.
ANS:
d
Topic: Hedge of investment in an international subsidiary LO 5 A U.S. parent hedges its exposure to exchange rate changes caused by its investment in its subsidiary in Singapore. The subsidiary’s functional currency is the U.S. dollar. Where are gains and losses on the hedge reported in the consolidated financial statements? a. b. c. d.
In other comprehensive income. They are not reported. In income. As an adjustment to Investment in subsidiary.
ANS:
c
Topic: Hedge of investment in an international subsidiary LO 5 A U.S. parent hedges its exposure to exchange rate changes caused by its investment in its subsidiary in Singapore. The subsidiary’s functional currency is the Singapore dollar. Where are gains and losses on the hedge reported in the consolidated financial statements? a. b. c. d.
In other comprehensive income. They are not reported. In income. As an adjustment to Investment in subsidiary.
ANS:
a
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-25
76.
Topic: Hedge of investment in an international subsidiary LO 5 McDonald’s Corporation hedges its investments in international subsidiaries. All subsidiaries have a positive position in net assets. The hedge gains and losses are reported in other comprehensive income. For the subsidiaries located in euro countries, which statement is true? a. b. c. d. ANS:
77.
78.
McDonald’s can hedge its investments with euro-denominated borrowings. McDonald’s remeasures the accounts of these subsidiaries before consolidating them. If the U.S. dollar weakens against the euro, McDonald’s will show translation losses on the subsidiaries. If the U.S. dollar is expected to strengthen against the euro, McDonald’s will be motivated to do less hedging of its investments in subsidiaries. a
Topic: Hedge of net investment in international subsidiaries LO 5 A U.S. company has subsidiaries whose functional currency is the U.S. dollar. Assume the subsidiaries’ liabilities remeasured at the current rate exceed their assets remeasured at the current rate. Which investment hedges the U.S. company’s currency risk from these subsidiaries? a. b. c. d.
Put options in the subsidiaries’ currency Investments in debt securities in the subsidiaries’ currency Debt denominated in the subsidiaries’ currency Forward sale in the subsidiaries’ currency
ANS:
b
Topic: Hedge of net investment in international subsidiaries LO 5 A U.S. company has subsidiaries whose functional currency is their local currency. Assume the subsidiaries have a positive net asset position. Which investment hedges the U.S. company’s currency risk from these subsidiaries? a. b. c. d.
Call options in the subsidiaries’ currency Investments in debt securities in the subsidiaries’ currency Debt denominated in the subsidiaries’ currency Forward purchase in the subsidiaries’ currency
ANS:
c
©Cambridge Business Publishers, 2023 8-26
Advanced Accounting, 5th Edition
79.
Topic: Hedge accounting LO 2, 3, 4, 5 Which one of the following is not an example of hedge accounting for a U.S. company? a. b. c. d. ANS:
80.
b
Topic: Hedge accounting LO 2, 3, 4, 5 Which one of the following is an example of hedge accounting for a U.S. company? a. b. c. d. ANS:
81.
A translation gain or loss on an international subsidiary is reported in other comprehensive income; changes in the value of the related hedge are also reported in other comprehensive income. Changes in euro-denominated receivables are reported in income; changes in the value of the related hedge are also reported in income. Changes in the value of a hedge of a forecasted sale denominated in euros are reported in other comprehensive income until the sale is made; the sale itself is reported as revenue when the sale is made. Changes in the value of a euro-denominated purchase order are reported in income; changes in the value of the related hedge are also reported in income.
Remeasurement gains and losses on international subsidiaries are reported in income as incurred; changes in the value of related hedges are also reported in income as incurred. Gains and losses on forward contracts not qualifying as hedges are reported in income as incurred. Changes in the U.S. dollar value of foreign currency denominated purchase orders for merchandise are an adjustment to the inventory value when delivered. Changes in the U.S. dollar value of euro-denominated receivables are reported in income; changes in the value of the related hedge are also reported in income. c
Topic: Hedge accounting LO 1, 2, 3, 4, 5 On November 1, 2023, a U.S. company enters into a forward sale contract, in which it agrees to sell €100,000 at a fixed rate on February 1, 2024, when it expects to receive €100,000. The company’s accounting year ends December 31. Changes in the value of the forward contract are reported in 2023 income in which one of the following situations? a. b. c. d. ANS:
The U.S. company uses the forward contract to hedge a purchase of merchandise, denominated in euros, that is expected to be made on February 1. The U.S. company uses the forward contract to hedge exposure to its investment in a French subsidiary, whose functional currency is the euro. The U.S. company uses the forward contract to hedge a sale of merchandise, denominated in euros, that was made on November 1. The U.S. company uses the forward contract to hedge a sale of merchandise, denominated in euros, that is expected to be made on February 1. c
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-27
82.
Topic: Speculative forward purchase contract LO 6 On November 30, 2023, a U.S. company, with a December 31 year-end, enters a forward purchase contract for €100,000 to be delivered on March 20, 2024, when the forward rate for March 20 delivery is $1.13/€. The forward contract does not qualify as a hedge. At year-end, the forward rate for delivery on March 30 is $1.115/€. The company closes the contract at its expiration date, when the spot rate is $1.12/€. At what amount are gains and losses reported in income on the forward in 2023 and 2024? a. b. c. d. ANS:
83.
84.
2023 $0 $0 $1,500 loss $1,500 gain
2024 $1,000 gain $1,000 loss $500 gain $500 loss
c The change in value of the forward is reported in income as the forward rate changes. For 2023, the loss is ($1.13 – $1.115) x €100,000 = $1,500. For 2024, the gain is ($1.12 – $1.115) x €100,000 = $500.
Topic: Speculative forward purchase contract LO 6 A U.S. company enters a forward purchase contract for speculative purposes. When are gains and losses on the hedge investment reported in income? a. b. c. d.
When the forward contract changes in market value When the forward contract is closed When the forward contract is determined to be an effective hedge When the merchandise is sold
ANS:
a
Topic: Speculative forward sale contract LO 6 On November 30, 2023, a U.S. company, with a December 31 year-end, enters a forward sale contract for £100,000 to be delivered on March 20, 2024, when the forward rate for March 20 delivery is $1.38/£. The forward contract does not qualify as a hedge. At year-end, the forward rate for delivery on March 30 is $1.375/€. The company closes the contract at its expiration date, when the spot rate is $1.40/€. At what amount are gains and losses reported in income on the forward in 2023 and 2024? a. b. c. d. ANS:
2023 $0 $0 $500 gain $500 loss
2024 $2,000 gain $2,000 loss $2,500 loss $2,500 gain
c The change in value of the forward is reported in income as the forward rate changes. For 2023, the gain is ($1.38 – $1.375) x €100,000 = $500. For 2024, the loss is ($1.40 – $1.375) x €100,000 = $2,500.
©Cambridge Business Publishers, 2023 8-28
Advanced Accounting, 5th Edition
85.
Topic: IFRS for foreign currency hedging LO 7 IFRS requires which reporting practice, not allowed under U.S. GAAP? a. b.
d.
Reporting foreign currency derivative positions at cost rather than at market value Reporting gains and losses on cash flow hedges as adjustments to the carrying value of related nonfinancial acquisitions Reporting gains and losses on firm commitment hedges as adjustments to the carrying value of related asset acquisitions Reporting foreign currency derivative positions at market rather than at cost
ANS:
b
c.
86.
87.
Topic: IFRS for cash flow hedges LO 7 A U.K. company that reports using IFRS plans on acquiring a building from a U.S. company, at a price denominated in U.S. dollars. The U.K. company locks in the price of the building, in pounds sterling, using a forward purchase contract. The company reports a loss on the forward contract. When the loss from the forward purchase is reclassified from accumulated other comprehensive income, what is the effect? a. b. c. d.
Depreciation expense increases. When the equipment is sold, the gain (loss) on sale is reduced (increased). A loss on hedging is reported in income. The equipment account is increased.
ANS:
d
Topic: IFRS for cash flow hedges LO 7 An IFRS company in the U.K. hedges its forecasted purchase of equipment from a German supplier, using a forward contract to lock in the cost of the euros, in pounds sterling, needed to pay for the equipment. The company incurs a gain on the forward. Which statement below is true? a. b. c. d. ANS:
The company’s equipment balance on its balance sheet will be higher than if the company had used U.S. GAAP. Equipment depreciation expense each year will be higher than if the company had used U.S. GAAP. The company’s equipment balance on its balance sheet will be lower than if the company had used U.S. GAAP. Equipment depreciation expense each year will be lower than if the company had used U.S. GAAP. c
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-29
88.
89.
90.
Topic: IFRS for cash flow hedge LO 7 On November 30, 2023, an Italian company, with a December 31 year-end, enters a forward purchase contract for £100,000 to be delivered for €120,000 on April 20, 2024. The contract hedges a forecasted purchase of equipment. At year-end, the forward price for delivery on April 20 is €118,000. The forward is closed, and the equipment purchased on April 20, when the spot price is €121,000. The company follows IFRS. The company records the equipment at a. b. c. d.
€100,000 €118,000 €120,000 €121,000
ANS:
c The equipment is recorded at the spot price of €121,000, reduced for the €1,000 (= €121,000 – €120,000) gain on the forward contract.
Topic: IFRS and U.S. GAAP for hedges LO 7 U.S. and IFRS hedge accounting standards divide up hedges into three categories. What are the three categories? a. b. c. d.
Hedging using forwards, options, and swaps FV-NI hedges, FV-OCI hedges, and unreported hedges Short hedges, long hedges, and neutral hedges Fair value hedges, cash flow hedges, and hedges of net investments
ANS:
d
Topic: IFRS and U.S. GAAP for hedges LO 7 IFRS and U.S. GAAP for hedge accounting differ on which of the following points? a. b. c. d. ANS:
In order to use hedge accounting, U.S. GAAP requires hedges to be highly effective, while IFRS requires that the hedge fits with the company’s risk management strategy. U.S. GAAP requires changes in the value of all speculative hedges to be reported in income, while IFRS allows speculative hedge gains and losses to be reported in other comprehensive income. U.S. GAAP requires changes in the value of cash flow hedges to be reclassified from other comprehensive income when the hedged transaction is reported in income, while IFRS allows permanent reporting of these gains and losses in AOCI. IFRS requires gains and losses on hedges to be reported in the same income line with losses and gains on the hedged item, while U.S. GAAP is silent on this issue. a
©Cambridge Business Publishers, 2023 8-30
Advanced Accounting, 5th Edition
PROBLEMS 1.
Receivables and payables valuation LO 1 A U.S. company records the following receivables and payables denominated in other currencies: • $115,000 in receivables recorded on sales of €100,000 to customers in France • $5,000 in receivables recorded on sales of 100,000 pesos to customers in Mexico • $72,000 in payables recorded on purchases of A$100,000 from suppliers in Australia • $2,000 in payables recorded on purchases of 100,000 rupees from suppliers in India All receivables and payables are still on hand at year-end. At year-end, the exchange rates are as follows: • $1.17/€ • $0.045/peso • $0.71/A$ • $0.035/rupee Required a. At what U.S. dollar value will each receivable and payable balance be reported at yearend? b. What is the net gain or loss on exchange rate changes, reported for the year? ANS: a.
b.
2.
$117,000 receivable from customers in France $4,500 receivable from customers in Mexico $71,000 payable to Australian suppliers $3,500 payable to suppliers in India $117,000 - $115,000 = $2,000 gain $4,500 - $5,000 = 500 loss $72,000 - $71,000 = 1,000 gain $2,000 - $3,500 = 1,500 loss Net gain $1,000
Topic: Receivables and payables valuation LO 1 U.S. company has the following receivables and payables denominated in foreign currencies, prior to closing on December 31. Item 1. Receivable 2. Receivable 3. Payable 4. Payable
Current $ balance $ 112,000 376,600 1,355,000 64,600
Foreign currency balance 100,000 euros 500,000 Singapore dollars 1,000,000 pounds sterling 500,000 Hong Kong dollars
December 31 spot rate $1.15 0.75 1.35 0.13
Required Prepare the adjusting entry the U.S. company makes at December 31 to update its receivables and payables. Show all calculations.
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-31
ANS: Item 1 2 3 4 Net adjustment
Book balance ($) Dr (Cr) $ 112,000 376,600 (1,355,000) (64,600)
Dollar equivalent, 12/31 Dr (Cr) $ 115,000 = $1.15 x 100,000 375,000 = $0.75 x 500,000 (1,350,000) = $1.35 x 1,000,000 (65,000) = $0.13 x 500,000
Adjustment $ 3,000 gain 1,600 loss 5,000 gain __400 loss $6,000 gain
Adjusting entry Accounts receivable ($3,000 - $1,600) 1,400 Accounts payable ($5,000 - $400) 4,600 Exchange gain To record the net exchange gain on the receivables and payables at December 31. 3.
6,000
Topic: Import transaction LO 1 A U.S. company takes delivery of merchandise costing £100,000 on October 19, 2023. The company pays for the merchandise, in pounds sterling, on February 19, 2024. It sells the merchandise later in 2024. The U.S. company has a December 31 year-end. Spot rates ($/£) are as follows:
October 19, 2023 December 31, 2023 February 19, 2024
Spot Rate $1.385 1.387 1.400
Required Calculate the following amounts appearing in the U.S. company’s financial statements. a. b. c. d.
Exchange gain or loss, 2023 income statement Exchange gain or loss, 2024 income statement Cost of goods sold, 2024 Accounts payable, December 31, 2023 balance sheet
ANS: a. b. c. d.
($1.387 – $1.385) x £100,000 = $200 loss ($1.400 – $1.387) x £100,000 = $1,300 loss $1.385 x £100,000 = $138,500 $1.387 x £100,000 = $138,700
©Cambridge Business Publishers, 2023 8-32
Advanced Accounting, 5th Edition
4.
Topic: Export transaction LO 1 A U.S. company sells goods to a customer in Singapore on November 5, 2023, at a price of S$100,000. The company receives payment from the customer, in Singapore dollars, on February 5, 2024. The U.S. company has a December 31 year-end. Spot rates ($/S$) are as follows:
November 5, 2023 December 31, 2023 February 5, 2024
Spot Rate $0.750 0.747 0.748
Required Calculate the following amounts appearing in the U.S. company’s financial statements.
5.
a. b. c. d.
Exchange gain or loss, 2023 income statement Exchange gain or loss, 2024 income statement Sales revenue, 2023 Accounts receivable, December 31, 2023 balance sheet
ANS: a. b. c. d.
($0.75 – $0.747) x S$100,000 = $300 loss ($0.748 – $0.747) x S$100,000 = $100 gain $0.75 x S$100,000 = $75,000 $0.747 x S$100,000 = $74,700
Topic: Export transaction LO 1 A U.S. company sells goods to a customer in Canada on October 20, 2023, at a price of C$100,000. The company receives payment from the customer, in Canadian dollars, on February 1, 2024, and immediately converts the payment to U.S. dollars. The U.S. company has a December 31 yearend. Spot rates ($/C$) are as follows:
October 20, 2023 December 31, 2023 February 1, 2024
Spot Rate $0.785 0.787 0.784
Required Prepare the U.S. company’s journal entries to record these events. ANS: October 20, 2023 Accounts receivable
785,000 Sales revenue
785,000
December 31, 2023 Accounts receivable
200
Exchange gain (income) ($0.787 – $0.785) x C$100,000 = $200 gain
Test Bank, Chapter 8
200
©Cambridge Business Publishers, 2023 8-33
February 1, 2024 Exchange loss (income)
300
Accounts receivable ($0.784 – $0.787) x C$100,000 = $300 loss
300
Foreign currency
78,400 Accounts receivable
78,400
Cash
78,400 Foreign currency
6.
78,400
Topic: Import transaction LO 1 A U.S. company takes delivery of goods from a supplier in Hong Kong on December 1, 2023, at an invoice price of HK$100,000. The company purchases Hong Kong dollars in the spot market and pays the supplier on March 1, 2024. The U.S. company has a December 31 year-end. Spot rates ($/HK$) are as follows:
December 1, 2023 December 31, 2023 March 1, 2024
Spot Rate $0.128 0.126 0.130
Required Prepare the U.S. company’s journal entries to record these events. ANS: December 1, 2023 Inventory
12,800 Accounts payable
December 31, 2023 Accounts payable
12,800
200
Exchange gain ($0.128 – $0.126) x HK$100,000 = $200 gain March 1, 2024 Exchange loss
200
400
Accounts payable ($0.13 – $0.126) x HK$100,000 = $400 loss Foreign currency
400
13,000 Cash
Accounts payable
13,000 Foreign currency
©Cambridge Business Publishers, 2023 8-34
13,000
13,000
Advanced Accounting, 5th Edition
7.
Topic: Import/export transactions LO 1 Use the following $/£ spot rates to answer the questions below.
October 15, 2023 December 31, 2023 March 1, 2024
Spot Rate $1.358 1.375 1.395
For each question below, the U.S. company has a December 31 year-end. Required a. A U.S. company sold merchandise to a U.K. customer on October 15, 2023; payment of £100,000 is received on March 1, 2024. Calculate the following amounts: i. ii. iii. b.
ANS: a.
b.
Accounts receivable, December 31, 2023 Sales revenue, 2023 income statement 2023 exchange gain/loss 2024 exchange gain/loss
A U.S. company bought merchandise from a U.K. customer on October 15, 2023; payment of £100,000 was made on March 1, 2024. Calculate the following amounts: i. ii. iii.
Accounts payable, December 31, 2023 Inventory, December 31, 2023 2023 exchange gain/loss 2024 exchange gain/loss
i. ii. iii.
Accounts receivable, December 31, 2023: $137,500 Sales revenue, 2023 income statement: $135,800 2023 exchange gain/loss: ($1.375 - $1.358) x £100,000 = $1,700 gain 2024 exchange gain/loss: ($1.395 - $1.375) x £100,000 = $2,000 gain
i. ii. iii.
Accounts payable, December 31, 2023: $137,500 Inventory, December 31, 2023: $135,800 2023 exchange gain/loss: ($1.375 - $1.358) x £100,000 = $1,700 loss 2024 exchange gain/loss: ($1.395 - $1.375) x £100,000 = $2,000 loss
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-35
8.
Topic: Import/export transactions LO 1 A U.S. company sells to customers in Canada and buys from suppliers in Singapore. At December 31, 2023, the company’s year-end, the following items are reported on its balance sheet: Accounts receivable (C$2,500,000)..…………………… Accounts payable(S$1,400,000)…………………………..
$1,875,000 1,048,600
On January 22, 2024, when the spot rate is $0.752/C$, the company collects C$1,000,000 from customers. It collects the remaining C$1,500,000 on February 16, 2024, when the spot rate is $0.76/C$. On February 23, 2024, when the spot rate is $0.748/S$, the company pays suppliers S$800,000. On March 6, 2020, when the spot rate is $0.745/S$, the company pays suppliers the remaining S$600,000. Required Calculate the exchange gain or loss for 2024. Show calculations clearly. ANS: U.S. dollar value of collections: (C$1,000,000 x $0.752) + (C$1,500,000 x $0.76) = $1,892,000; $1,892,000 - $1,875,000 = $17,000 gain U.S. dollar value of payments: (S$800,000 x $0.748) + (S$600,000 x $0.745) = $1,045,400; $1,045,400 - $1,048,600 = $3,200 gain Total exchange gain = $17,000 + $3,200 = $20,200 9.
Topic: Foreign lending LO 1 A U.S. company purchases a 90-day certificate of deposit for €1,000,000 from a German bank on September 15, when the spot rate is $1.131/€. The certificate pays interest at an annual rate of 3 percent. On December 14, the certificate of deposit matures, and the company receives principal and interest due to it, in euros. The company records interest revenue at that time. The spot rate on December 14 is $1.14/€. The average spot rate for the period September 15 December 14 is $1.135/€. The company’s accounting year ends December 31. Required Prepare all necessary journal entries to record the above events on the U.S. company's books. ANS: September 15 Financial investments
1,131,000 Cash
December 14 Financial investments Exchange gain $9,000 = ($1.14 – $1.131) x €1,000,000 ©Cambridge Business Publishers, 2023 8-36
1,131,000
9,000 9,000
Advanced Accounting, 5th Edition
Foreign currency
1,148,550
Financial investments Interest income $8,550 = (€1,000,000 x 3% x 3/12) x $1.14 10.
1,140,000 8,550
Topic: Foreign lending LO 1 A U.S. company purchases a 3-month certificate of deposit from a Singapore bank at its face value of S$1,000,000 on November 1, 2023, when the spot rate is $0.725/S$. The certificate pays interest at an annual rate of 2.7 percent. On December 31, the company’s year-end, the spot rate is $0.73/S$. On February 1, 2024, when the spot rate is $0.74/S$, the certificate of deposit matures, and the company receives principal and interest of S$1,006,750. Required Prepare all necessary journal entries to record the above events on the U.S. company’s books, including year-end adjustments. ANS: November 1, 2023 Financial investments
725,000 Cash
725,000
December 31, 2023 Financial investments Interest receivable
5,000 3,285
Exchange gain Interest revenue Interest revenue = (S$1,000,000 x .027 x 2/12) x $0.73 = $3,285 Exchange gain = S$1,000,000 x ($0.73 - $0.725) = $5,000 February 1, 2024 Financial investments Interest receivable
5,000 3,285
10,000 45
Exchange gain (S$1,000,000 + S$4,500) x ($0.74 - $0.73) = $10,045 Foreign currency
10,045
744,995 Financial investments Interest receivable Interest revenue
740,000 3,330 1,665
S$1,006,750 x $0.74 = $744,995 (S$1,000,000 x .027 x 1/12) x $0.74 = $1,665
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-37
11.
Topic: Foreign borrowing LO 1 A U.S. company borrows HK$1,000,000 in a 2- month loan from a Hong Kong bank on August 1, when the spot rate is $0.13/HK$. The loan carries an annual interest rate of 2.1%, and principal and interest are due on October 1, in Hong Kong dollars. On October 1, when the spot rate is $0.15/HK$, the company pays principal and interest of HK$1,003,500 to close the loan. The company has a December 31 year-end. Required Prepare all necessary journal entries to record the above events on the U.S. company's books. ANS: August 1 Foreign currency
130,000 Loan payable
October 1 Exchange loss
130,000
20,000
Loan payable $20,000 = HK$1,000,000 x ($0.15 - $0.13) Interest expense Loan payable
20,000
525 150,000
Foreign currency HK$1,000,000 x 0.021 x 2/12 x $0.15 = $525 12.
150,525
Topic: Foreign borrowing LO 1 A U.S. company borrows HK$1,000,000 from a Hong Kong bank on November 1, 2024, when the spot rate is $0.127/HK$. The loan carries an interest rate of 3%, and principal and interest are due on April 1, 2025, in Hong Kong dollars. The spot rate on December 31, the company’s yearend, is $0.128/HK$. On April 1, 2025, the company pays principal and interest to close the loan. The spot rate on April 1 is $0.124/HK$. The average spot rate for the period November 1, 2024 – April 1, 2025 is $0.1272/HK$. Required Prepare all necessary journal entries to record the above events on the U.S. company's books, including year-end adjusting entries. ANS: November 1, 2024 Foreign currency
127,000 Loan payable
©Cambridge Business Publishers, 2023 8-38
127,000
Advanced Accounting, 5th Edition
December 31, 2024 Exchange loss
1,000
Loan payable $1,000 = ($0.128 – $0.127) x HK$1,000,000. Interest expense
1,000
640
Interest payable $640 = (HK$1,000,000 x 3% x 2/12) x $0.128 April 1, 2025 Loan payable
640
4,000
Exchange gain $4,000 = ($0.128 – $0.124) x HK$1,000,000 Interest payable
4,000
20
Exchange gain $20 = ($0.128 – $0.124) x HK$5,000 accrued interest at December 31, 2024. Interest expense
20
930
Interest payable $930 = (HK$1,000,000 x 3% x 3/12) x $0.124 Loan payable Interest payable
930
124,000 1,550 Foreign currency
13.
125,550
Topic: Hedging export transaction LO 2 On November 1, 2023, a U.S. company sells merchandise at a price of £100,000 to a U.K. customer, with payment, in pounds sterling, to be received on March 1, 2024. On November 1, the company enters a forward contract for delivery of £100,000 on March 1, 2024. On March 1, 2024, the company receives the £100,000, and uses the forward contract to exchange the pounds for dollars. The U.S. company has a December 31 year-end. Spot and forward rates ($/£) are as follows:
November 1, 2023 December 31, 2023 March 1, 2024
Spot Rate $1.385 1.362 1.318
Forward Rate for March 1, 2024 Delivery $1.381 1.358 1.318
Required Calculate the amounts below, appearing on the U.S. company’s financial statements. a. b. c.
Investment in forward contract, December 31, 2023 balance sheet. Indicate whether it is an asset or a liability. Gain or loss on forward contract, 2024 income statement. Indicate whether it is a gain or loss. Gain or loss on accounts receivable, 2024 income statement. Indicate whether it is a gain or loss.
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-39
ANS: a. b. c. 14.
£100,000 x ($1.381 – $1.358) = $2,300 asset £100,000 x ($1.358 – $1.318) = $4,000 gain £100,000 x ($1.362 – $1.318) = $4,400 loss
Topic: Hedging import transaction LO 2 A U.S. company buys merchandise on a regular basis from U.K. suppliers, with payment to be made in pounds sterling. On March 20, 2024, the company takes delivery of merchandise costing £100,000 from a U.K. supplier, with payment to be made on July 20, 2024. On March 20, the company enters a forward contract for delivery of £100,000 on July 20. On July 20, the company closes the contract and pays the supplier. The company has a June 30 year-end. Spot and forward rates ($/£) are as follows:
March 20, 2024 June 30, 2024 July 20, 2024
Spot Rate $1.322 1.346 1.339
Forward Rate for July 20, 2024 Delivery $ 1.330 1.344 1.339
Required Fill in the amounts below, appearing on the U.S. company’s financial statements. a. b. c. ANS: a. b. c. 15.
Investment in forward contract, June 30, 2024 balance sheet. Indicate whether it is an asset or a liability. Gain or loss on forward contract, fiscal 2025 income statement. Indicate whether it is a gain or loss. Gain or loss on accounts payable, fiscal 2025 income statement. Indicate whether it is a gain or loss. £100,000 x ($1.344 – $1.33) = $1,400 asset £100,000 x ($1.344 – $1.339) = $500 loss £100,000 x ($1.346 – $1.339) = $700 gain
Topic: Hedging export transaction, with adjusting entries LO 2 A U.S. company sells merchandise to a German customer on May 1 for €100,000. The customer pays the bill on August 1. To hedge foreign exchange risk, on May 1 the U.S. company enters a forward sale contract for €100,000 with an August 1 delivery date. On August 1, the company collects the €100,000 from the customer and closes the forward contract. The company’s fiscal year ends June 30. Relevant rates ($/€) are as follows:
May 1 June 30 August 1 ©Cambridge Business Publishers, 2023 8-40
Spot Rate $1.135 1.141 1.156
Forward Rate for August 1 Delivery $ 1.137 1.144 1.156
Advanced Accounting, 5th Edition
Required Make the journal entries to record the above events, including appropriate fiscal year-end adjusting entries. ANS: May 1 Accounts receivable
113,500 Sales revenue
113,500
June 30 Accounts receivable
600 Exchange gain
600
($1.141 – $1.135) x €100,000 = $10,000 Exchange loss
700 Investment in forward
700
($1.144 – $1.137) x €100,000 = $700 August 1 Accounts receivable
1,500 Exchange gain
1,500
($1.156 – $1.141) x €100,000 = $1,500 Exchange loss
1,200 Investment in forward
1,200
($1.156 – $1.144) x €100,000 = $1,200 Foreign currency
115,600 Accounts receivable
Cash Investment in forward
115,600 113,700 1,900
Foreign currency 16.
115,600
Topic: Hedging import transaction, with adjusting entries LO 2 A U.S. company buys merchandise from a Singapore supplier on May 1 for S$100,000. The company pays the bill on August 1. To hedge foreign exchange risk, on May 1 the U.S. company enters a forward purchase contract for S$100,000 with an August 1 delivery date. On August 1 the company purchases the Singapore dollars through the forward contract and pays the supplier. On August 15 the company sells the merchandise to a U.S. customer for $110,000 in cash. Assume the company records cost of goods sold when the sale is made. The company’s fiscal year ends June 30. Relevant rates ($/S$) are as follows:
May 1 June 30 August 1
Test Bank, Chapter 8
Spot Rate $0.762 0.759 0.740
Forward Rate for August 1 Delivery $0.761 0.756 0.740 ©Cambridge Business Publishers, 2023 8-41
Required Make the journal entries to record the above events, including appropriate fiscal year-end adjusting entries. ANS: May 1 Inventory
76,200 Accounts payable
June 30 Accounts payable
76,200
300 Exchange gain
300
($0.762 –$0.759) x S$100,000 = $300 Exchange loss
500 Investment in forward
500
($0.761 – $0.756) x S$100,000 = $500 August 1 Accounts payable
1,900 Exchange gain
1,900
($0.759 - $0.740) x S$100,000 = $1,900 Exchange loss
1,600 Investment in forward
1,600
($0.756 – $0.740) x S$100,000 = $1,600 Foreign currency Investment in forward
74,000 2,100 Cash
Accounts payable
76,100 74,000
Foreign currency August 15 Cash
74,000
110,000 Sales revenue
Cost of goods sold
76,200 Inventory
©Cambridge Business Publishers, 2023 8-42
110,000
76,200
Advanced Accounting, 5th Edition
17.
Topic: Hedge of firm purchase commitment, with adjusting entries LO 3 A U.S. company buys from suppliers in Germany and pays the suppliers in euros. The company’s accounting year ends June 30. On March 1, the company sends a purchase order to a German supplier for €100,000 in merchandise, payable in euros on delivery, delivery to take place August 15. On the same day the company enters into a forward contract for delivery of €100,000 on August 15. The forward qualifies as a fair value hedge of a firm commitment. On August 15, the company closes the forward contract, takes delivery of the merchandise, and pays the supplier. The company sells the merchandise to its U.S. customers for $200,000 in cash on August 31. Information on $/€ exchange rates is as follows:
March 1 June 30 August 15
Spot Rate $1.135 1.132 1.128
Forward Rate for August 15 Delivery $1.133 1.131 1.128
Required Make the journal entries to record the above events, including appropriate year-end adjusting entries. ANS: June 30 Exchange loss
200 Investment in forward
200
($1.133 – $1.131) x €100,000 = $200 Firm commitment
200 Exchange gain
200
August 15 Exchange loss
300 Investment in forward
300
($1.131 – $1.128) x €100,000 = $300 Firm commitment
300 Exchange gain
Foreign currency Investment in forward
300 112,800 500
Cash Inventory
113,300 Firm commitment Foreign currency
Test Bank, Chapter 8
113,300
500 112,800
©Cambridge Business Publishers, 2023 8-43
August 31 Cash
200,000 Sales revenue
Cost of goods sold
200,000 113,300
Inventory 18.
113,300
Topic: Hedge of a firm purchase commitment LO 3 A U.S. company issues a purchase order on May 1 to buy merchandise from an Australian supplier for A$100,000, to be paid on August 1. To hedge the foreign exchange risk, on May 1 the U.S. company enters a forward purchase contract for A$100,000 with an August 1 delivery date. On June 1, the company takes delivery of the merchandise. On August 1 the company purchases the Australian dollars through the forward contract and pays the supplier. On August 15, the company sells the merchandise to a U.S. customer for $85,000 in cash. Assume the company records cost of goods sold when the sale is made. The company’s accounting year ends December 31. Relevant rates ($/A$) are as follows:
May 1 June 1 August 1
Spot Rate $0.720 0.730 0.740
Forward Rate for August 1 Delivery $ 0.722 0.731 0.740
Required Make the journal entries to record the above events, including appropriate fiscal year-end adjusting entries. ANS: June 1 Investment in forward
900 Exchange gain
900
($0.731 – $0.722) x A$100,000 = $900 Exchange loss
900 Firm commitment
Inventory Firm commitment
900 72,100 900
Accounts payable August 1 Exchange loss
73,000
1,000 Accounts payable
1,000
($0.74 – $0.73) x A$100,000 = $1,000 Investment in forward
900 Exchange gain
900
($0.74 – $0.731) x A$100,000 = $900 ©Cambridge Business Publishers, 2023 8-44
Advanced Accounting, 5th Edition
Foreign currency
74,000 Investment in forward Cash
Accounts payable
1,800 72,200 74,000
Foreign currency
74,000
August 15 Cash
85,000 Sales revenue
85,000
Cost of goods sold
72,100 Inventory
19.
72,100
Topic: Hedge of a firm purchase commitment, with adjusting entries LO 3 A U.S. company issues a purchase order on April 1 to buy merchandise from an Australian supplier for A$100,000, to be paid on August 1. To hedge the foreign exchange risk, on April 1 the U.S. company enters a forward purchase contract for A$100,000 with an August 1 delivery date. On May 1, the company takes delivery of the merchandise. On August 1 the company purchases the Australian dollars through the forward contract and pays the supplier. On August 15, the company sells the merchandise to a U.S. customer for $95,000 in cash. Assume the company records cost of goods sold when the sale is made. The company’s fiscal year ends June 30. Relevant rates ($/A$) are as follows:
April 1 May 1 June 30 August 1
Spot Rate $0.776 0.772 0.765 0.778
Forward Rate for August 1 Delivery $ 0.774 0.770 0.762 0.778
Required Make the journal entries to record the above events, including appropriate fiscal year-end adjusting entries. ANS: May 1 Exchange loss
400 Investment in forward
400
($0.774 – $0.770) x A$100,000 = $400 Firm commitment
400 Exchange gain
Inventory
77,600 Firm commitment Accounts payable
Test Bank, Chapter 8
400
400 77,200 ©Cambridge Business Publishers, 2023 8-45
June 30 Accounts payable
700 Exchange gain
700
($0.772 – $0.765) x A$100,000 = $700 Exchange loss
800 Investment in forward
800
($0.770 – $0.762) x A$100,000 = $800 August 1 Exchange loss
1,300
Accounts payable ($0.778 – $0.765) x A$100,000 = $1,300
1,300
Investment in forward
1,600
Exchange gain ($0.778 – $0.762) x A$100,000 = $1,600
1,600
Foreign currency
77,800 Investment in forward Cash
Accounts payable
400 77,400 77,800
Foreign currency August 15 Cash
77,800
95,000 Sales revenue
Cost of goods sold
95,000 77,600
Inventory 20.
77,600
Topic: Hedge of firm sale commitment, with adjusting entries LO 3 A U.S. company sells merchandise to customers in Germany and receives payment in euros. The company’s accounting year ends June 30. On March 1, the company receives an order from a German customer for €100,000 in merchandise, payable in euros on delivery, delivery to take place August 15. On the same day the company enters into a forward contract for delivery of €100,000 on August 15. The forward qualifies as a fair value hedge of a firm commitment. On August 15, the company delivers the merchandise, receives payment of €100,000 from the customer, closes the forward contract and receives U.S. dollars. Information on $/€ exchange rates is as follows:
March 1 June 30 August 15 ©Cambridge Business Publishers, 2023 8-46
Spot Rate $1.135 1.132 1.128
Forward Rate for August 15 Delivery $1.133 1.131 1.128
Advanced Accounting, 5th Edition
Required Make the journal entries to record the above events, including appropriate year-end adjusting entries. ANS: June 30 Investment in forward
200 Exchange gain
200
($1.133 – $1.131) x €100,000 = $200 Exchange loss
200 Firm commitment
200
August 15 Investment in forward
300 Exchange gain
300
($1.131 – $1.128) x €100,000 = $300 Exchange loss
300 Firm commitment
300
Foreign currency Firm commitment
112,800 500 Sales revenue
113,300
Cash
113,300 Foreign currency Investment in forward
21.
112,800 500
Topic: Hedge of a firm sales commitment LO 3 A U.S. company with a December 31 accounting year-end receives a sales order on August 1 from a Swiss company, for the sale of merchandise priced at CHF100,000, payment to be received on October 1. To hedge the foreign exchange risk, on August 1 the U.S. company enters a forward sale contract for CHF100,000 with an October 1 delivery date. On September 1, the company delivers the merchandise to the customer. On October 1, the company receives payment and sells the CHF100,000 using the forward sale contract. Relevant rates ($/CHF) are as follows:
August 1 September 1 October 1
Spot Rate $1.080 1.082 1.079
Forward Rate for October 1 Delivery $1.081 1.083 1.079
Required Make the journal entries to record the above events.
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-47
ANS: September 1 Exchange loss
200 Investment in forward
200
($1.083 – $1.081) x CHF100,000 = $200 Firm commitment
200 Exchange gain
200
Accounts receivable Firm commitment
108,200 200 108,000
Sales revenue October 1 Exchange loss
300 Accounts receivable
300
($1.082 – $1.079) x CHF100,000 = $300 Investment in forward
400 Exchange gain
400
($1.083 – $1.079) x CHF100,000 = $400 Foreign currency
107,900 Accounts receivable
Cash
107,900 108,100
Foreign currency Investment in forward 22.
107,900 200
Topic: Hedge of a firm sales commitment, with adjusting entries LO 3 A U.S. company receives a sales order on December 10 from a Swiss company, for the sale of merchandise priced at CHF100,000, payment to be received on February 10. To hedge the foreign exchange risk, on December 10 the U.S. company enters a forward sale contract for CHF100,000 with a February 10 delivery date. On January 10, the company delivers the merchandise to the customer. On February 10, the company receives payment and sells the CHF100,000 using the forward sale contract. The company’s accounting year ends December 31. Relevant rates ($/CHF) are as follows:
December 10 December 31 January 10 February 10
©Cambridge Business Publishers, 2023 8-48
Spot Rate $1.080 1.075 1.078 1.070
Forward Rate for February 10 Delivery $1.082 1.076 1.077 1.070
Advanced Accounting, 5th Edition
Required Make the journal entries to record the above events, including appropriate year-end adjusting entries. ANS: December 31 Investment in forward
600 Exchange gain
600
($1.082 – $1.076) x CHF100,000 = $600 Exchange loss
600 Firm commitment
600
January 10 Exchange loss
100 Investment in forward
100
($1.077 – $1.076) x CHF100,000 = $100 Firm commitment
100 Exchange gain
100
Accounts receivable Firm commitment
107,800 500 Sales revenue
108,300
February 10 Exchange loss
800 Accounts receivable
800
($1.078 – $1.070) x CHF100,000 = $800 Investment in forward
700 Exchange gain
700
($1.077 – $1.070) x CHF100,000 = $700 Foreign currency
107,000 Accounts receivable
107,000
Cash
108,200 Foreign currency Investment in forward
Test Bank, Chapter 8
107,000 1,200
©Cambridge Business Publishers, 2023 8-49
23.
Topic: Hedge of forecasted import transaction LO 4 A U.S. company with a December 31 year-end plans to buy HK$100,000 in merchandise from a Hong Kong supplier at the beginning of June, payment to be made in Hong Kong dollars. On March 1, the company enters a forward contract, locking in the purchase price of HK$100,000 at $0.128/HK$, for delivery on June 1. The forward contract qualifies as a cash flow hedge of the forecasted purchase. On June 1, when the spot rate is $0.130/HK$, the company takes delivery of the merchandise and pays the supplier HK$100,000, using the forward contract. The company sells the merchandise on August 15 to a U.S. customer for $20,000. Required Prepare the journal entries on June 1 and August 15 to record the above events. Assume the company records cost of goods sold when the sale is made. ANS: June 1 Investment in forward
200
Gain on cash flow hedge (OCI) $200 = ($0.130– $0.128) x HK$100,000 Foreign currency
200
13,000 Investment in forward Cash
Inventory
200 12,800 13,000
Foreign currency August 15 Cash
13,000
20,000 Sales revenue
Cost of goods sold Reclassification of gain on cash flow hedge (OCI)
12,800 200 Inventory
©Cambridge Business Publishers, 2023 8-50
20,000
13,000
Advanced Accounting, 5th Edition
24.
Topic: Hedge of forecasted import transaction, adjusting entries LO 4 A U.S. company plans to buy ¥100,000 in merchandise from an Chinese supplier at the beginning of March 2024, payment to be made in yuan (¥). On November 1, 2023, it enters a forward contract, locking in the purchase price of ¥100,000 at $0.158/¥ for delivery on March 1, 2024. The forward contract qualifies as a cash flow hedge of a forecasted transaction. On March 1, 2024, the company takes delivery of ¥100,000 in merchandise from the Chinese supplier and pays for it by exchanging U.S. dollars for yuan using the forward contract. The company sells the merchandise later in 2024. Its accounting year ends December 31. Exchange rates ($/¥) are as follows: Spot Rate $0.154 0.162 0.168
November 1, 2023 December 31, 2023 March 1, 2024
Forward Rate for March 1, 2024 Delivery $0.158 0.164 0.168
Required Prepare the journal entries to record these events, including year-end adjusting entries and the cost of sales entry when the merchandise is sold. ANS: December 31, 2023 Investment in forward
600 Gain on cash flow hedge (OCI)
600
$600 = ($0.164– $0.158) x ¥100,000 March 1, 2024 Investment in forward
400 Gain on cash flow hedge (OCI)
400
$400 = ($0.168– $0.164) x ¥100,000 Foreign currency
16,800 Investment in forward Cash
Inventory
1,000 15,800 16,800
Foreign currency Entry to record cost of sales Cost of sales Reclassification of gain on cash flow hedge (OCI)
15,800 1,000 Inventory
Test Bank, Chapter 8
16,800
16,800
©Cambridge Business Publishers, 2023 8-51
25.
Topic: Hedge of forecasted export transaction LO 4 A U.S. company with a December 31 year-end plans to sell merchandise to a Swiss customer at the beginning of June for CHF100,000, payable on delivery in Swiss francs (CHF). On March 1, the company enters a forward contract, locking in the selling price of CHF100,000 at $1.08/CHF, for delivery on June 1. The forward contract qualifies as a cash flow hedge of the forecasted sale. On June 1, when the spot rate is $1.065/CHF, the company delivers the merchandise to the Swiss customer and receives CHF100,000. The company converts the CHF100,000 to U.S. dollars using the forward contract. Required Prepare the U.S. company’s June 1 journal entries to (1) adjust the forward contract to its current value, (2) record the sale, (3) convert the currency to U.S. dollars, and (4) adjust the sales revenue for reclassification of the gain or loss on the forward contract. ANS: June 1 (1) Investment in forward
1,500
Gain on cash flow hedge (OCI) $1,500 = ($0.08 - $0.165) x CHF100,000. (2) Foreign currency
1,500
106,500 Sales revenue
(3) Cash
106,500
108,000 Investment in forward Foreign currency
(4) Reclassification of gain on cash flow hedge (OCI)
1,500 Sales revenue
©Cambridge Business Publishers, 2023 8-52
1,500 106,500
1,500
Advanced Accounting, 5th Edition
26.
Topic: Hedge of forecasted export transaction, with adjusting entries LO 4 A U.S. company plans to sell RM100,000 in merchandise to a Malaysian customer at the beginning of September 2024, with payment to be received in ringgits (RM). On June 1, 2024, it enters a forward contract, locking in the selling price of RM100,000 at $0.256/RM for delivery on September 1, 2024. The forward contract qualifies as a cash flow hedge of a forecasted transaction. On September 1, 2024, the company delivers the merchandise to the Malaysian customer, collects RM100,000 payment from the customer, and exchanges it for U.S. dollars using the forward contract. The company’s accounting year ends June 30. Exchange rates ($/RM) are as follows:
June 1, 2024 June 30, 2024 September 1, 2024
Spot Rate $0.258 0.254 0.252
Forward Rate for September 1, 2024 Delivery $0.256 0.253 0.252
Required Prepare the journal entries to record these events, including fiscal year-end adjusting entries. ANS: June 30, 2024 Investment in forward
300
Gain on cash flow hedge (OCI) $300 = ($0.256– $0.253) x RM100,000 September 1, 2024 Investment in forward
300
100
Gain on cash flow hedge (OCI) $100 = ($0.253– $0.252) x RM100,000 Foreign currency Reclassification of gain on cash flow hedge (OCI)
100
25,200 400 Sales revenue
Cash
25,600 Foreign currency Investment in forward
Test Bank, Chapter 8
25,600
25,200 400
©Cambridge Business Publishers, 2023 8-53
27.
Topic: Hedge of forecasted export transaction, with adjusting entries LO 4 A U.S. company forecasts that it will sell €100,000 in merchandise to an Italian customer in mid-February 2024, and will collect payment, in euros, on delivery. On November 1, 2023, it enters a forward contract, locking in the selling price of €100,000 at $1.132/€ for delivery on February 15, 2024. The forward qualifies as a cash flow hedge of a forecasted transaction. On January 10, 2024, the company closes the forward contract. On February 15, 2024, the company sells €100,000 of merchandise to the Italian customer, receives immediate payment in euros, and exchanges euros for U.S. dollars on the spot market. Information on $/€ exchange rates follows:
November 1, 2023 December 31, 2023 January 10, 2024 February 15, 2024
Spot Rate $1.130 1.133 1.147 1.156
Forward Rate for February 15, 2024 Delivery $1.132 1.134 1.148 1.156
Required Prepare the journal entries to record these events, including any adjusting entries at the company’s December 31 year-end. ANS: December 31, 2023 Loss on cash flow hedge (OCI)
200 Investment in forward
200
($1.134 – $1.132) x €100,000 = $200 January 10, 2024 Loss on cash flow hedge (OCI)
1,400 Investment in forward
1,400
($1.148 – $1.134) x €100,000 = $1,400 Investment in forward
1,600 Cash
1,600
February 15, 2024 Foreign currency
115,600 Reclassification of loss on cash flow hedge (OCI) Sales revenue
Cash
115,600 Foreign currency
©Cambridge Business Publishers, 2023 8-54
1,600 114,000
115,600
Advanced Accounting, 5th Edition
28.
Topic: Hedge of forecasted export transaction, with adjusting entries LO 4 A U.S. company forecasts that it will receive £100,000 in sales revenue in 6 months. To lock in the dollar value of these revenues, on September 10, 2023, it enters a forward sale contract to deliver £100,000 to a broker at a rate of $1.324/£ on March 10, 2024. On March 10, 2024, the U.S. company receives £100,000 from customers, records the revenue as earned, and sells the currency using the forward contract. The U.S. company’s accounting year ends December 31, and the forward qualifies as a cash flow hedge. Relevant exchange rates are:
September 10, 2023 December 31, 2023 March 10, 2024
Spot Rate $1.325 1.327 1.321
Forward Rate for March 10, 2024 Delivery $1.324 1.326 1.321
Required Prepare the journal entries made by the U.S. company in 2019 and 2020, including any December 31, 2023 adjustments. ANS: December 31, 2023 Loss on cash flow hedge (OCI) Investment in forward $200 = ($1.326 - $1.324) x £100,000. March 10, 2024 Investment in forward Gain on cash flow hedge (OCI) $500 = ($1.326 - $1.321) x £100,000.
200 200
500 500
Foreign currency Reclassification of gain on cash flow hedge (OCI) Sales revenue
132,100 300
Cash
132,400 Investment in forward contract Foreign currency
Test Bank, Chapter 8
132,400
300 132,100
©Cambridge Business Publishers, 2023 8-55
29.
Topic: Hedge of forecasted export transaction, alternative scenarios LO 4 A U.S. company forecasts that it will receive A$1,000,000 in sales revenue from an Australian customer in 5 months. To lock in the dollar value of these revenues, on October 25, 2023, it enters a forward sale contract to deliver A$1,000,000 to a broker on March 25, 2024. The contract qualifies as a cash flow hedge of the forecasted sale. On March 25, 2024, the U.S. company receives A$1,000,000 in payment from the customer, records the revenue as earned, and sells the currency using the forward contract. The U.S. company’s accounting year ends December 31. Relevant exchange rates ($/A$) are:
October 25, 2023 December 31, 2023 March 25, 2024
Spot Rate $0.74 0.73 0.72
Forward Rate for March 25, 2024 Delivery $0.742 0.731 0.720
Required a. Calculate the following balances, reported on the U.S. company’s books: i. Investment in forward, December 31, 2023 (indicate whether it is an asset or liability). ii. Sales revenue, 2024 b. Now assume the U.S. company closes the forward contract on February 1, 2024 when the forward rate for March 25 delivery is $0.728. What is sales revenue for 2024? ANS: a.
i. ii.
b. 30.
Investment in forward, asset at December 31, 2023 = ($0.742 - $.731) x A$1,000,000 = $11,000 Sales revenue, 2024 = (A$1,000,000 x $0.72) + (($0.742 - $0.72) x A$1,000,000 = $742,000
Sales revenue, 2024 = (A$1,000,000 x $0.72 + (($0.742 - $0.728) x A$1,000,000 = $734,000
Topic: Hedge accounting vs normal accounting for hedge of forecasted purchase LO 4 On October 1, 2023, a U.S. company expects to purchase merchandise from a Singapore supplier for around S$100,000, at the end of March, payment to be made on delivery. To hedge the expected purchase, on October 1, 2023, the company enters a forward contract that locks in the purchase price of S$100,000 for delivery on March 31, 2024. The company takes delivery of the merchandise on March 31, 2024, the company closes the forward and immediately pays the supplier. The forward contract qualifies as a cash flow hedge of the forecasted transaction. The company has a December 31 year-end. Forward and spot prices for Singapore dollars ($/S$) are as follows:
October 1, 2023 December 31, 2023 March 31, 2024 ©Cambridge Business Publishers, 2023 8-56
Spot Rate $0.754 0.775 0.772
Forward Rate for March 31, 2024 Delivery $0.756 0.776 0.772
Advanced Accounting, 5th Edition
Required: a. Prepare the journal entries to record the above events, including year-end adjustments. b. The company sells the inventory on June 1, 2024. Prepare the journal entry to record the cost of goods sold. c. Repeat requirements a. and b., assuming the forward contract does not qualify for hedge accounting. ANS: a.
December 31, 2023 Investment in forward
2,000 Gain on cash flow hedge (OCI)
2,000
$2,000 = ($0.776 - $0.756) x S$100,000 March 31, 2024 Loss on cash flow hedge (OCI)
400 Investment in forward
400
$400 = ($0.776 - $0.772) x S$100,000 Foreign currency
77,200 Cash Investment in forward
Inventory
75,600 1,600 77,200
Foreign currency b.
June 1, 2024 Cost of goods sold Reclassification of gain on cash flow hedge (OCI)
77,200
75,600 1,600 Inventory
c.
77,200
December 31, 2023 Investment in forward
2,000 Exchange gain (income)
2,000
$2,000 = ($0.776 - $0.756) x S$100,000 March 31, 2024 Exchange loss (income)
400 Investment in forward
400
$400 = ($0.776 - $0.772) x S$100,000 Foreign currency
77,200 Cash Investment in forward
Inventory
75,600 1,600 77,200
Foreign currency
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-57
77,200
June 1, 2024 Cost of goods sold
77,200 Inventory
31.
77,200
Topic: Hedge accounting versus normal accounting for hedge of forecasted sale LO 4 A U.S. company enters a forward contract on October 31, 2023 to hedge a forecasted sale of merchandise to a Canadian customer for C$100,000 on March 31, 2024. On March 31 it delivers the merchandise to the customer, receives payment of C$100,000, and uses the forward contract to exchange C$ for U.S. dollars. The company’s accounting year ends December 31. Exchange rates ($/C$) are as follows:
October 31, 2023 December 31, 2023 March 31, 2024
Spot Rate $0.772 0.769 0.760
Forward Rate for March 31, 2024 Delivery $0.770 0.766 0.760
Required a. Prepare the journal entries necessary to record the above events, including year-end adjustments, if the forward qualifies as a cash flow hedge of the forecasted sale. b. Prepare the journal entries necessary to record the above events, including year-end adjustments, if the forward does not qualify for hedge accounting. ANS: a. December 31, 2023 Investment in forward
400 Gain on cash flow hedge (OCI)
400
($1.770 – $1.766) x C$100,000 = $400 March 31, 2024 Investment in forward
600 Gain on cash flow hedge (OCI)
600
($1.766 – $1.760) x C$100,000 = $600 Foreign currency Reclassification of gain on cash flow hedge (OCI)
76,000 1,000 Sales revenue
Cash
77,000 Investment in forward Foreign currency
©Cambridge Business Publishers, 2023 8-58
77,000
1,000 76,000
Advanced Accounting, 5th Edition
b. December 31, 2023 Investment in forward
400 Exchange gain (income)
400
($1.770 – $1.766) x C$100,000 = $400 March 31, 2024 Investment in forward
600 Exchange gain (income)
600
($1.766 – $1.760) x C$100,000 = $600 Foreign currency
76,000 Sales revenue
76,000
Cash
77,000 Investment in forward Foreign currency
32.
1,000 76,000
Topic: Hedge of net investment in subsidiary, functional currency is local currency LO 5 A U.S. company acquired a subsidiary in Denmark several years ago. The subsidiary’s functional currency is the krone (kr). Following is financial information for the subsidiary for 2024: January 1, 2024 net assets Reported net income
Kr300,000 20,000
The subsidiary did not declare dividends in 2024. Exchange rates ($/kr) are as follows:
January 1, 2024 2024 average December 31, 2024
Spot Rate $0.155 0.152 0.148
Forward Rate for December 31, 2024 Delivery $ 0.157 0.153 0.148
Required a. Assume the U.S. company hedges its net investment in the subsidiary by entering a forward contract on January 1, 2024, for December 31, 2021 delivery of kr200,000. i. Is this hedge a forward purchase or a forward sale? Explain. ii. Calculate the gain or loss on exposure to the subsidiary, and the loss or gain on the forward contract. iii. What is the net amount of translation gains or losses, reported in consolidated other comprehensive income for 2024? b. Assume the U.S. company hedges its net investment in the subsidiary with krone denominated debt in the amount of kr200,000, held throughout 2024. i. Calculate the gain or loss on the debt. ii. What is the net amount of translation gains or losses, reported in consolidated other comprehensive income for 2024?
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-59
ANS: a.
i.
Exposure is net assets > 0, generating losses when rates decline. Hedge with a forward sale, which generates gains when rates decline.
ii. Beginning net assets + Net income Ending net assets Translation loss
b. 33.
kr Kr300,000 20,000
Rate $0.155 0.152
Kr320,000
0.148
iii.
Gain on forward sale: ($0.157 - $0.148) x kr200,000 = $1,800 Net translation loss, reported in OCI: $2,180 - $1,800 = $380
i. ii.
The gain on the debt is ($0.155 - $0.148) x kr200,000 = $1,400 Net translation loss, reported in OCI: $2,180 - $1,400 = $ 780
US $ $46,500 3,040 49,540 47,360 $ 2,180
Topic: Speculation with forward contracts LO 6 On November 1, 2023, a U.S. company thinks the euro will weaken against the U.S. dollar, so it enters into a forward contract in the amount of €1,000,000, for delivery on March 15, 2024. This contract does not qualify for hedge accounting. The company’s accounting year ends December 31. The company closes the contract on January 15, 2024. Exchange rates are as follows ($/€):
November 1, 2023 December 31, 2023 January 15, 2024
Spot Rate $1.12 1.16 1.17
Forward Rate for March 15, 2024 Delivery $1.13 1.15 1.18
Required a. Does the company enter a forward purchase or a forward sale contract? Explain. b. Prepare the journal entries necessary on December 31, 2023 and January 15, 2024 to record the above events. ANS: a.
b.
The company expects the $/€ rate to decrease. Therefore, it enters a forward sale contract to lock in the selling price of euros. If the rate declines, as the company expects, it will gain by selling euros at the higher contract price and buying at the lower market price. December 31, 2023 Exchange loss (income)
20,000 Investment in forward
$20,000 = ($1.15 - $1.13) x €1,000,000
©Cambridge Business Publishers, 2023 8-60
Advanced Accounting, 5th Edition
20,000
January 15, 2024 Exchange loss (income)
30,000 Investment in forward
30,000
$30,000 = ($1.18 - $1.15) x €1,000,000 The company closes the forward by entering a forward purchase for delivery on March 15, 2024, at $1.18/€. So the company buys at $1.18 and sells at $1.13, for a net cash outflow of ($1.18 - $1.13) x €1,000,000 = $50,000. Investment in forward
50,000 Cash
34.
50,000
Topic: IFRS basis adjustment, merchandise LO 7 An Italian company plans to purchase merchandise from a company in Singapore at the end of September, payment of S$1,000,000 due in Singapore dollars. On May 15, the Italian company enters a forward purchase contract for S$1,000,000 to be delivered on September 30. The contract hedges a forecasted purchase of a nonfinancial asset. The forward is closed and the merchandise purchased on September 30. The merchandise is sold by the Italian company in November. The Italian company follows IFRS and has a June 30 year-end. Following is information on exchange rates (€/S$):
May 15 June 30 September 30
Spot Rate €0.617 0.625 0.621
Forward Rate for September 30 Delivery €0.619 0.624 0.621
Required Prepare the journal entries to record the following events: a. b. c. ANS: a.
June 30 adjusting entry September 30 adjusting entries and transactions Entry to recognize cost of goods sold in November June 30 Investment in forward
5,000 Gain on cash flow hedge (OCI)
5,000
€5,000 = (€0.624 - €0.619) x S$1,000,000 b.
September 30 Loss on cash flow hedge (OCI)
3,000 Investment in forward
3,000
€3,000 = (€0.624 - €0.621) x S$1,000,000 Foreign currency
621,000 Investment in forward Cash
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-61
2,000 619,000
Inventory Reclassification of gain on cash flow hedge (OCI)
619,000 2,000 Foreign currency
621,000
c. Cost of goods sold
619,000 Inventory
35.
619,000
Topic: IFRS basis adjustment, equipment LO 7 On November 16, 2023, a U.K. company, with a December 31 year-end, enters a forward purchase contract for €100,000 to be delivered on June 30, 2024. The contract hedges a forecasted purchase of equipment from a German supplier. The forward is closed and the equipment purchased on June 30, 2024. The equipment has a 5-year life, and is straight-line depreciated, no residual value. The company follows IFRS. Following is information on exchange rates (£/€):
November 16, 2023 December 31, 2023 June 30, 2024
Spot Rate £0.835 0.840 0.842
Forward Rate for June 30, 2024 Delivery £0.836 0.841 0.842
Required Prepare the U.K. company’s journal entries to record the following events: a. b. c. ANS: a.
December 31, 2023 adjusting entry June 30, 2024 adjusting entries and transactions Equipment depreciation expense for 2024 December 31, 2023 Investment in forward
500 Gain on cash flow hedge (OCI)
500
£500 = (£0.841 - £0.836) x €100,000 b.
June 30, 2024 Investment in forward
100 Gain on cash flow hedge (OCI)
100
£100 = (£0.842 - £0.841) x €100,000 Foreign currency
84,200 Investment in forward Cash
Equipment Reclassification of gain on cash flow hedge
600 83,600 83,600 600
Foreign currency ©Cambridge Business Publishers, 2023 8-62
Advanced Accounting, 5th Edition
84,200
c.
December 31, 2024 Depreciation expense
8,360 Equipment, net
£8,360 = (£83,600/5) x 1/2
Test Bank, Chapter 8
©Cambridge Business Publishers, 2023 8-63
8,360
TEST BANK CHAPTER 9 Futures, Options and Interest Rate Swaps MULTIPLE CHOICE 1.
Topic: Accounting for derivatives and hedging LO 1 Which situation below accurately describes an instance of “hedge accounting”? a. b. c. d.
ANS: 2.
b
Topic: Accounting for derivatives and hedging LO 1 Which statement below accurately describes reporting for a cash flow hedge of an inventory purchase? a. b. c. d. ANS:
3.
A company hedges its investment in a debt security classified as trading. Because of the hedge, changes in the value of the security are reported in other comprehensive income. A company hedges its inventory, normally carried at cost. Because of the hedge, changes in the value of the inventory are reported in income. A company hedging a forecasted purchase of inventory recognizes changes in the value of the inventory in other comprehensive income. A company hedges its inventory, normally carried at cost. Because of the hedge, changes in the value of the inventory are reported in other comprehensive income and the inventory is carried at market value.
Changes in the value of the hedge are reported in other comprehensive income until the inventory is sold. Changes in the value of the hedge are reported in other comprehensive income until the inventory is purchased. Changes in the value of the hedge are reported in income, along with changes in the forecasted purchase obligation. Changes in the value of the hedge are reported in other comprehensive income, along with changes in the forecasted purchase obligation. a
Topic: Accounting for derivatives and hedging LO 1 A derivative designated as a hedge of a firm commitment (a documented forthcoming sale or purchase): a. b. c. d.
Is marked to market each period along with the hedged purchase or sale commitment, even though the sale or purchase has not occurred. Remains off-balance-sheet until the sale or purchase takes place. Offsets the hedged item that is marked to market each period, with the resulting gain or loss deferred in OCI until the derivative is closed out. Is marked to market each period, with the resulting gain or loss deferred in OCI until the sale or purchase takes place.
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-1
ANS: 4.
5.
6.
Topic: Accounting for derivatives LO 1 If a derivative does not qualify for hedge accounting: a. b. c. d.
Changes in its fair value are reported in other comprehensive income. Changes in its fair value are reported in income. Gains and losses are reported only when realized. It is not reported on the balance sheet.
ANS:
b
Topic: Hedging with futures LO 1 When hedging an inventory balance with a futures contract, hedge gains may not perfectly offset inventory losses if a. b. c. d.
spot prices differ from futures prices. the company sells the inventory. interest rates increase. the company invests in short futures.
ANS:
a
Topic: Hedging with futures LO 1 When hedging financial investments with a futures contract, the basis difference is a.
7.
a
b. c. d.
the difference between the change in value of the futures and the change in value of the investments. the difference between the terms of the futures and the investments position. the effect on OCI if the hedge is terminated early. the difference between spot and futures prices for the investments.
ANS:
d
Topic: Hedging with futures LO 1 The basis difference in futures contracts used as fair value hedges is a. b. c. d.
reported directly in income. reported in OCI and systematically recategorized to income. reported directly in income or reported in OCI and systematically recategorized to income. reported as an adjustment to beginning retained earnings.
ANS:
c
©Cambridge Business Publishers, 2023 9-2
Advanced Accounting, 5th Edition
8.
Topic: Hedging with futures LO 1 A company uses futures to hedge its inventory. Which statement is true concerning the hedge? a. b. c.
9.
d.
The company takes a short position in futures and records changes in their value in OCI. The company takes a long position in futures and records changes in their value in income. The company takes a short position in futures and records changes in their value in income. The company takes a long position in futures and records changes in their value in OCI.
ANS:
c
Topic: Hedging with futures LO 1 A company uses futures to hedge a firm commitment to buy inventory. Which statement is true concerning the hedge? a. b. c.
10.
d.
The company takes a short position in futures and records changes in their value in OCI. The company takes a long position in futures and records changes in their value in income. The company takes a short position in futures and records changes in their value in income. The company takes a long position in futures and records changes in their value in OCI.
ANS:
b
Topic: Hedging with futures LO 1 A company uses futures to hedge a forecasted purchase of inventory. Which statement is true concerning the hedge? a. b. c.
11.
d.
The company takes a short position in futures and records changes in their value in OCI. The company takes a long position in futures and records changes in their value in income. The company takes a short position in futures and records changes in their value in income. The company takes a long position in futures and records changes in their value in OCI.
ANS:
d
Topic: Hedging with futures LO 1 When a company hedges inventory price risk on its existing inventory balance, the difference between using forwards and futures is: a. b. c. d.
futures have a basis difference but forwards do not. futures are more likely to be used to sell the inventory held by the company. futures are used to hedge the inventory price risk over a longer period of time. futures are more likely to be closed out by taking an opposite position.
ANS:
d
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-3
12.
Topic: Hedging interest rate risk with futures LO 1 A company invests in short-term notes yielding a 3% return, and plans to reinvest the principal in 90 days. The company wants to hedge against the possibility that interest rates will be lower at that time. If the interest rate on U.S. Treasury bills is highly correlated with the yield on the notes, which investment is an effective hedge? a. b. c.
13.
d.
Invest in futures locking in the selling price of U.S. treasury bills. Take a long position in U.S. Treasury bill futures Swap the fixed interest on the note for a floating interest rate tied to the U.S. Treasury bill rate Take a short position in U.S. Treasury bill futures
ANS:
b
Topic: Hedging interest rate risk with futures LO 1 A company has a firm commitment to roll over a variable rate loan every 90 days. It hedges its interest rate risk by selling 90-day Treasury bills at a fixed price, for delivery in 90 days. The hedge is determined to be effective. Which statement is true? a. b. c. d. ANS:
14.
If the Treasury bill rate increases, the company gains on the hedge. If the variable rate on the loan increases, the company gains on its firm commitment to roll over the loan. Changes in the value of the short position in Treasury bills accumulate in other comprehensive income until interest expense is recognized on the loan. If the Treasury bill rate declines, interest expense on the loan after it is rolled over will be lower than if no hedging had occurred. a
Topic: Reporting value changes in futures hedges LO 1 A company holds significant inventories of diesel fuel. It uses diesel fuel futures to hedge fluctuations in its inventory value. Hedge effectiveness includes all futures value changes. If the company uses hedge accounting, the gain or loss on the futures investment is: a. b. c. d.
Shown on the income statement as incurred Shown as a component of other comprehensive income until the inventory is sold Used to adjust the carrying value of the inventory Not reported
ANS:
a
©Cambridge Business Publishers, 2023 9-4
Advanced Accounting, 5th Edition
15.
Topic: Reporting value changes in futures hedges LO 1 A company hedges its purchases of oats, expected to occur in 3 months, using oat futures expiring in 3 months. Hedge effectiveness includes all futures value changes. Which statement is true concerning value changes in the oat futures? a. b. c. d. ANS:
16.
If the futures qualify as a fair value hedge of a firm commitment to buy oats, all gains and losses on the futures are reported in income with no offset from the hedged item. If the futures are effective hedges of forecasted purchases of oats, losses on the futures are reported in income, but gains adjust the value of the oat inventory. If the futures are effective hedges of a firm commitment to buy oats, gains and losses on the futures adjust cost of goods sold as they occur. If the futures are effective hedges of forecasted purchases of oats, gains and losses on the futures adjust cost of goods sold as they occur. c
Topic: Hedging equity investments: futures LO 1 A company with an investment in equity securities with no significant influence hedges this position by investing in short futures on the equity securities. This hedging relationship will generally have some effect on income, even though the terms match exactly, because: a. b. c. d. ANS:
Hedge accounting is not allowed for hedges of equity investments. Gains and losses on equity securities futures are valued at changes in futures prices while losses and gains on the equity securities are valued at changes in current market prices. The value of the futures is not related to the market value of the equity securities. Gains and losses on the equity securities are valued at changes in futures prices while losses and gains on the futures are valued at changes in current market prices. b
Use the following information to answer questions 17 – 19. A firm carries a commodity inventory at a cost of $760,000 and plans to sell it in 60 days. Its market value is currently $800,000. To hedge against a decline in value of the commodity, the company sells commodity futures for delivery in 60 days at a price of $800,000. There is no margin deposit. At the company’s year-end, 30 days later, the 30-day futures price is $790,000 and the inventory market value declined to $791,000. Income effects of the inventory and the futures are reported in cost of goods sold. 17.
Topic: Fair value hedge of inventory: futures LO 1 At what amount is the inventory valued on the company’s year-end balance sheet? a. b. c. d.
$760,000 $751,000 $791,000 $790,000
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-5
ANS: 18.
19.
b $760,000 - $9,000 = $751,000. See journal entries below.
Topic: Fair value hedge of inventory: futures LO 1 What is the net effect of value changes in the futures and the inventory on cost of goods sold? a. b. c. d.
Increase $1,000 Increase $10,000 Decrease $1,000 No effect
ANS:
c $9,000 - $10,000 = $(1,000). See journal entries below.
Topic: Fair value hedge of inventory: futures LO 1 How are the futures reported on the company’s year-end balance sheet? a. b. c. d.
$10,000 asset $10,000 liability $ 9,000 asset $ 9,000 liability
ANS:
a See journal entries below.
Use the following information to answer questions 20 – 23. Continue with the information used for questions 17 – 19. Thirty days after the end of the year, the market value of the inventory is $786,000. The company closes the futures contract and sells the inventory on the spot market for $786,000. 20.
Topic: Fair value hedge of inventory: futures LO 1 How much cash does the company receive from or pay to the broker when it closes the futures contract? a. b. c. d.
Pays $14,000 Pays $5,000 Receives $5,000 Receives $14,000
ANS:
d $800,000 – $786,000 = $14,000
©Cambridge Business Publishers, 2023 9-6
Advanced Accounting, 5th Edition
21.
22.
23.
Topic: Fair value hedge of inventory: futures LO 1 What amount is reported for cost of goods sold for the year? a. b. c. d.
$760,000 $747,000 $786,000 $746,000
ANS:
b $746,000 + $5,000 - $4,000 = $747,000. See journal entries below.
Topic: Fair value hedge of inventory: futures LO 1 What is the net cash inflow from the inventory and the hedge over the two years, assuming the inventory was purchased for cash during this period? a. b. c. d.
$54,000 $44,000 $40,000 $34,000
ANS:
c -$760,000 + $14,000 + 786,000 = $40,000. See journal entries below.
Topic: Fair value hedge of inventory: futures LO 1 What is the net income effect from the inventory and the hedge over the two years? a. b. c. d.
$54,000 $44,000 $40,000 $34,000
ANS:
c -$9,000 + $10,000 - $5,000 + $4,000 + $786,000 - $746,000 = $40,000. See journal entries below.
Journal entries for Questions 17 – 23: First year: Cost of goods sold
9,000
Inventory $9,000 = $800,000 - $791,000. Futures Cost of goods sold $10,000 = $800,000 - $790,000.
Test Bank, Chapter 9
9,000
10,000 10,000
©Cambridge Business Publishers, 2023 9-7
Second year: Cost of goods sold
5,000
Inventory $5,000 = $791,000 - $786,000. Futures
5,000 4,000
Cost of goods sold $4,000 = $790,000 - $786,000. Cash
4,000 14,000
Futures $14,000 = $10,000 + $4,000. Cash
9,000 786,000
Sales revenue Cost of goods sold Inventory $746,000 = $760,000 - $9,000 - $5,000. 24.
786,000 746,000 746,000
Topic: Fair value hedge of inventory: futures LO 1 A company carries inventory at a cost of $400,000. When the inventory has a market value of $405,000, the company takes a short position in futures, at a price of $405,500. The futures position is a fair value hedge of the inventory. By the end of the year, the market price of the inventory is $404,000 and the futures price is $404,900. The company still holds the short position. The inventory is reported on the balance sheet at what amount? a. b. c. d.
$404,000 $399,000 $399,400 $404,900
ANS:
b $400,000 – ($405,000 – $404,000) = $399,000
©Cambridge Business Publishers, 2023 9-8
Advanced Accounting, 5th Edition
Use the following information to answer Questions 25 and 26. A company carries an inventory of corn at cost, $500,000. The inventory has a fair value of $525,000. The company hedges the inventory’s value by selling commodity futures for delivery in 60 days for $525,000. There is no margin deposit. In 30 days, at the firm’s year end, the futures price for delivery in 30 days is $530,000 and the inventory’s fair value increased to $532,000. 25.
26.
Topic: Fair value hedge of inventory: futures LO 1 Assuming the futures are qualified hedges of the inventory, at what value does the firm report its corn inventory at year-end? a. b. c. d.
$530,000 $525,000 $532,000 $507,000
ANS:
d $500,000 + ($532,000 – $525,000) = $507,000
Topic: Fair value hedge of inventory: futures LO 1 If the firm closes its futures position at year-end, how much does it receive from/pay to the broker? a. b. c. d.
$7,000 received $5,000 paid $5,000 received $7,000 paid
ANS:
b Sell at $525,000 and buy at $530,000, for a net cash outflow of $5,000.
Use the following information to answer Questions 27 - 29. A jewelry manufacturer anticipates purchasing 1,000 ounces of gold in 90 days. To hedge against increases in the price of gold, it purchases 1,000 ounces of gold futures for delivery in 90 days at $1,400 per ounce, also the current market price. The futures investment qualifies as a cash flow hedge of the forecasted purchase. The company makes a $10,000 margin deposit. In 90 days, the market price of gold is $1,475; the company closes out its futures position and purchases the gold several days later for $1,480 per ounce. A few months later, the company sells jewelry products containing the gold. 27.
Topic: Cash flow hedge of forecasted purchase: futures LO 1 How much cash will the company receive upon closing the futures contract? a. b. c. d.
$85,000 $75,000 $80,000 $70,000
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-9
ANS: 28.
29.
a $10,000 + [($1,475 – $1,400) x 1,000] = $85,000
Topic: Cash flow hedge of forecasted purchase: futures LO 1 Prior to its sale, at what amount will the purchased gold inventory be carried on the company’s books? a. b. c. d.
$1,475,000 $1,405,000 $1,480,000 $1,470,000
ANS:
c $1,480 x 1,000 = $1,480,000
Topic: Cash flow hedge of forecasted purchase: futures LO 1 The company will report cost of goods sold on the sale at: a. b. c. d.
$1,480,000 $1,400,000 $1,475,000 $1,405,000
ANS:
d $1,480,000 – [($1,475 – $1,400) x 1,000] = $1,405,000 Cost of goods sold is reduced by the gain on the futures contract, reclassified from other comprehensive income.
Use the following information to answer questions 30 – 32 below. A company obtains a $1,000,000 variable rate loan, at a 2.1% interest rate. The loan is renewable every 3 months, and the interest rate is reset at each renewal. The company hedges against rising interest rates by taking a short futures position in $1,000,000 of 3-month Treasury bills at 99. There is no margin deposit, and the hedge qualifies as a fair value hedge of a firm liability commitment. At the end of 3 months, the Treasury bills sell for 98.2 and the loan renews at 2.9%. The company closes the futures contract and renews the loan. All income effects of the loan and the futures are reported in interest expense. 30.
Topic: Fair value hedge of firm loan commitment: futures LO 1 How much cash does the company receive from or pay to the broker when it closes the futures contract? a. b. c. d.
Receives $2,000 Pays $2,000 Receives $8,000 Pays $8,000
©Cambridge Business Publishers, 2023 9-10
Advanced Accounting, 5th Edition
ANS: 31.
32.
a ((.99 - .982)/4) x $1,000,000 = $2,000
Topic: Fair value hedge of firm loan commitment: futures LO 1 At what net amount is the new loan initially reported on the company’s balance sheet? a. b. c. d.
$1,000,000 $1,002,000 $ 998,000 $1,008,000
ANS:
b $1,000,000 + $2,000 premium = $1,002,000
Topic: Fair value hedge of firm loan commitment: futures LO 1 At what amount will interest expense be reported for the new loan? a. b. c. d.
$ 7,250 $ 9,250 $29,000 $ 5,250
ANS:
d (($1,000,000 x 0.029)/4) - $2,000 = $5,250
Use the following information to answer Questions 33 – 35 below: On November 1, 2023, a company forecasts that it will need 10,000 bushels of oats in 90 days to manufacture its products. To lock in the purchase price of the oats, it purchases 10,000 bushels of oats for delivery in 90 days at $4.00 per bushel. The long futures position qualifies as a cash flow hedge of the forecasted purchase of oats and is considered highly effective. No margin deposit is required. On December 31, 2023, the 30-day futures price is $4.01 per bushel and the spot price is $4.018 per bushel. On January 29, 2024, the company closes its futures position and purchases the oats on the spot market for $4.024 per bushel. Products containing the oats are sold on February 10, 2024. The company has a December 31 year-end. 33.
Topic: Cash flow hedge of forecasted purchase: futures LO 1 What is the effect on 2023 income? a. b. c. d.
$ 140 gain $ 140 loss $ 180 gain no effect
ANS:
d The gain on the futures position is recorded in OCI, not income.
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-11
34.
35.
36.
37.
Topic: Cash flow hedge of forecasted purchase: futures LO 1 At what value is the inventory reported on January 29, 2024? a. b. c. d.
$40,000 $40,100 $40,180 $40,240
ANS:
d $4.024 x 10,000 = $40,240
Topic: Cash flow hedge of forecasted purchase: futures LO 1 What amount is reported as cost of goods sold for the oats included in February 10 sales? a. b. c. d.
$40,000 $40,100 $40,180 $40,240
ANS:
a $40,240 – [($4.024 - $4.00) x 10,000] = $40,000
Topic: Options LO 2 When a share of a company’s stock is selling for $55.00, a call option on the stock with a strike price of $56.00 is said to be: a. b. c. d.
In the money Out of the money Carried at basis An American option
ANS:
b
Topic: Options LO 2 When a share of a company’s stock is selling for $55.00, a put option on the stock with a strike price of $56.00 is said to be: a. b. c. d.
in the money. out of the money. carried at basis. worthless.
ANS:
a
©Cambridge Business Publishers, 2023 9-12
Advanced Accounting, 5th Edition
38.
Topic: Fair value hedge: options LO 2 A company uses options to hedge the value of its merchandise inventory. If the options qualify as a fair value hedge of the inventory, and analysis of hedge effectiveness includes option time value, which statement is true concerning reporting for changes in the time value of the options? a.
39.
b. c. d.
Changes in option time value remain in other comprehensive income until the merchandise is purchased. Changes in option time value are adjustments to cost of goods sold as they occur. Changes in option time value adjust cost of goods sold when the merchandise is sold. Changes in option time value are either adjustments to cost of goods sold as they occur, or are reported in OCI and systematically recategorized as adjustments to cost of goods sold.
ANS:
b
Topic: Fair value hedge: options LO 2 A company uses options to hedge the value of its merchandise inventory. If the options qualify as a fair value hedge of the inventory, and analysis of hedge effectiveness excludes option time value, which statement is true concerning reporting for changes in the time value of the options? a. b. c. d.
Changes in option time value remain in other comprehensive income until the merchandise is purchased. Changes in option time value are adjustments to cost of goods sold as they occur. Changes in option time value adjust cost of goods sold when the merchandise is sold. Changes in option time value are either adjustments to cost of goods sold as they occur, or are reported in OCI and systematically recategorized as adjustments to cost of goods sold.
ANS:
d
Use the following information to answer questions 40 and 41. On January 1, a company holds an inventory of a commodity carried at a cost of $100,000. The commodity's current market value is $110,000. To guard against a potential decline in the value of that inventory, the company purchases put options with a total strike price of $110,000 exercisable in 3 months, paying a total of $200 for the options. The puts qualify as a fair value hedge of the inventory. All income effects of the inventory and the hedge are reported in cost of goods sold. On February 15, the commodity's market price is $108,000 and the company closes the hedge by selling the put options for $2,050. The company has a December 31 year-end.
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-13
40.
41.
Topic: Fair value hedge of inventory: options LO 2 What is the net effect of the above events on the year’s cost of goods sold? a. b. c. d.
$ 2,000 $ (150) $(1,850) no net effect
ANS:
b ($110,000 - $108,000) – ($2,050 - $200) = $(150)
Topic: Fair value hedge of inventory: options LO 2 If the inventory is sold for $107,500 later in the year, what is the gross margin recognized on the sale? a. b. c. d.
$(3,500) $ (500) $ 9,500 $ 9,200
ANS:
c $107,500 – ($100,000 - $2,000) = $9,500
Use the following information to answer Questions 42 – 47 below. On May 1, 2024, a company has merchandise reported at a cost of $150,000 and with a fair value of $175,000. It invests $900 in 3-month put options with a strike price of $175,000. At the company’s June 30, 2024 year-end, the merchandise has a fair value of $172,000 and the options are worth $3,400. On July 31, 2024, the merchandise has a fair value of $170,000 and the company sells the options for their intrinsic value of $5,000. The company uses hedge accounting, the options qualify as a fair value hedge of the inventory, and option time value is straight-line amortized over 3 months. 42.
Topic: Fair value hedge of inventory: options LO 2 The company reports the merchandise inventory at what value on June 30, 2024? a. b. c. d.
$147,000 $150,000 $169,000 $172,000
ANS:
a $150,000 – ($175,000 - $172,000) = $147,000.
©Cambridge Business Publishers, 2023 9-14
Advanced Accounting, 5th Edition
43.
44.
45.
46.
Topic: Fair value hedge of inventory: options LO 2 What is the net effect of the above events on fiscal 2024 income? a. b. c. d.
$500 net decrease $600 net decrease $2,500 net increase $3,000 net decrease
ANS:
b The increase in option intrinsic value and decrease in merchandise inventory value have no net effect. Option time value amortization of $900 x 2/3 = $600 increases cost of goods sold and reduces income.
Topic: Fair value hedge of inventory: options LO 2 What is the net effect of the above events on fiscal 2025 income? a. b. c. d.
$2,400 increase $2,000 decrease $400 decrease $300 decrease
ANS:
d The increase in option intrinsic value and decrease in merchandise inventory value have no net effect. Option time value amortization of $900 x 1/3 = $300 increases cost of goods sold and reduces income.
Topic: Fair value hedge of inventory: options LO 2 Assume that changes in option time value are reported in income as incurred. What is the net effect of the above events on fiscal 2024 income? a. b. c. d.
$500 net decrease $600 net decrease $2,500 net increase $3,000 net decrease
ANS:
a $2,500 increase in option value - $3,000 decrease in inventory value = $500 net decrease
Topic: Fair value hedge of inventory: options LO 2 Assume that changes in option time value are reported in income as incurred. What is the net effect of the above events on fiscal 2025 income? a. b. c. d.
$2,400 increase $2,000 decrease $400 decrease $300 decrease
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-15
ANS:
47.
c $1,600 increase in option value - $2,000 decrease in inventory value = $400 net decrease
Topic: Fair value hedge of inventory: options LO 2 If the merchandise inventory is sold later in the year for $172,000, what is the gross margin on this sale? a. b. c. d.
$12,000 $(3,000) $20,000 $27,000
ANS:
d The inventory balance, after adjustments for hedge accounting, is $150,000 - $3,000 $2,000) = $145,000. Gross margin = $172,000 - $145,000 = $27,000.
Use the following information to answer Questions 48 – 53 below. A company bought debt securities, classified as available-for-sale, on August 1, 2023, for $105,000. On November 1, 2023, the market value of the securities is $100,000, and the company buys put options, expiring on March 1, 2024, for $500, locking in the selling price of the securities at $100,000. The options qualify as a fair value hedge of the securities. All income effects of the securities and the hedge are reported in “other gains (losses)” and the change in option time value is reported in income as incurred. At December 31, 2023, the reporting year-end, the market value of the securities is $98,000, and the options have a fair value of $2,600. On March 1, 2024, when the market value of the securities is $95,000, the company sells the options for their intrinsic value of $5,000, and also sells the securities. 48.
49.
Topic: Fair value hedge of investments: options LO 2 What is the time value of the options on December 31, 2023? a. b. c. d.
$ 600 $2,000 $2,600 $ 0
ANS:
a Intrinsic value is $100,000 – $98,000 = $2,000 $2,600 – $2,000 = $600
Topic: Fair value hedge of investments: options LO 2 The options increased in value by $2,100 in 2023. Where is this gain reported? a. b. c. d.
In other comprehensive income On the balance sheet as an increase in the securities investment In income, as “other gains” Not reported
©Cambridge Business Publishers, 2023 9-16
Advanced Accounting, 5th Edition
ANS: 50.
51.
52.
c
Topic: Fair value hedge of investments: options LO 2 The securities declined in value by $7,000 in 2023. Where is this loss reported? a. b. c. d.
$7,000 loss in other comprehensive income $5,000 loss in other comprehensive income and $2,000 loss in income, as “other losses” $5,000 loss in income, as “other losses” and $2,000 loss in other comprehensive income $7,000 loss in income, as “other losses
ANS:
b Use normal accounting during the unhedged period, and hedge accounting during the hedged period.
Topic: Fair value hedge of investments: options LO 2 What amount is reported for the investment in securities at December 31, 2023? a. b. c. d.
$ 98,000 $100,000 $103,000 $105,000
ANS:
a AFS securities are reported on the balance sheet at fair value.
Topic: Fair value hedge of investments: options LO 2 What is the net effect on the company’s 2023 “other gain (loss)” account, regarding the securities and the hedge? a. b. c. d.
$4,900 loss $2,100 gain $ 100 gain no net effect
ANS:
c $100,000 - $98,000 = $2,000 loss on investment $2,600 - $500 = $2,100 gain on puts $2,100 gain - $2,000 loss = $100 net gain
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-17
53.
Topic: Fair value hedge of investments: options LO 2 What is the net effect on the company’s 2024 “other gain (loss)”, regarding the securities and the hedge? a. b. c. d.
no net effect $5,500 loss $ 600 loss $5,600 loss
ANS:
d $98,000 - $95,000 = $3,000 loss on investment $5,000 - $2,600 = $2,400 gain on puts Reclassification of loss on investment from OCI to income = $5,000 loss $3,000 loss + $5,000 loss - $2,400 gain = $5,600 net loss
Use the following information to answer Questions 54 – 56. In 2023, a U.S. company issued a purchase order to a Singapore supplier for merchandise priced at S$1,000,000. At the time of the purchase order, the spot and relevant forward rate for Singapore dollars was $0.76. The company paid $3,000 for call options locking in the cost of S$1,000,000 at $760,000. The investment is a fair value hedge of the firm commitment to purchase the currency. All income effects of the purchase and the hedge are reported in cost of goods sold, and changes in option time value are reported in income as incurred. At the end of the year, the spot rate was $0.80/S$, the relevant forward rate was $0.81/S$, and the call options had a market value of $52,000. In 2024, the options expired. The spot rate was $0.83/S$, and the company sold the options at their intrinsic value of $70,000. The company then took delivery of the merchandise and paid the supplier with Singapore dollars purchased on the spot market. 54.
55.
Topic: Fair value hedge of firm commitment: options LO 2 At what value is the investment in options reported on the company’s 2023 balance sheet? a. b. c. d.
$50,000 $49,000 $67,000 $52,000
ANS:
d The options are marked to market and the end of year market value is $52,000.
Topic: Fair value hedge of firm commitment: options LO 2 What is the net impact on the company’s 2023 income? a. b. c. d.
$1,000 net loss $1,000 net gain $2,000 net loss no effect
©Cambridge Business Publishers, 2023 9-18
Advanced Accounting, 5th Edition
ANS:
56.
57.
Topic: Fair value hedge of firm commitment: options LO 2 At what value does the company report the inventory acquired in 2024? a. b. c. d.
$830,000 $810,000 $800,000 $760,000
ANS:
d $830,000 cash paid less the value of the firm commitment ($0.83 – $0.76) x S$1,000,000 = $70,000; $830,000 – $70,000 = $760,000.
Topic: Hedging with options: forecasted purchase LO 2 A company uses options to hedge its forecasted purchase of merchandise. If the options qualify as a cash flow hedge of the forecasted purchase, and analysis of hedge effectiveness excludes option time value, which statement is true concerning reporting for changes in the value of the options? a. b. c. d. ANS:
58.
a Loss on the firm commitment is ($0.81 – $0.76) x S$1,000,000 = $50,000 Gain on options is $52,000 – $3,000 = $49,000 $50,000 – $49,000 = $1,000 net loss
All changes in option value remain in other comprehensive income until the merchandise is purchased. All changes in option value are adjustments to cost of goods sold as they occur. Changes in intrinsic value adjust cost of goods sold when the merchandise is sold. Changes in intrinsic value adjust the carrying value of the merchandise when it is purchased. c
Topic: Hedge accounting with options: forecasted purchase LO 2 Option value changes are classified as intrinsic value changes and time value changes. Assume a company designates changes in intrinsic value as the hedge, with changes in time value reported in OCI with time value systematically amortized to income. For options used to hedge a forecasted sale of merchandise, when does the change in option intrinsic value impact income? a. b. c. d.
When the value changes occur. Never. When the merchandise sale is recorded. When the options are sold.
ANS:
c
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-19
Use the following information to answer questions 59 – 63. A U.S. company expects to sell £100,000 in merchandise to a customer in the U.K. in 3 months. To protect against a strengthening U.S. dollar, on November 1, 2023 the company pays $2,900 for put options on £100,000, with a strike price of $1.40/£, expiring February 1, 2024. The current forward rate for February 1 delivery is $1.38/£. The intrinsic value of the options is designated as a cash flow hedge of the forecasted sale, and changes in time value are reported in income as incurred. Income effects of the sale and the options are reported in sales revenue. On December 31, 2023, the company’s yearend, the spot rate is $1.375/£ and the options have a market value of $3,200. On February 1, 2024, the spot rate is $1.35/£, and the company sells the options for their intrinsic value. The company delivers the merchandise, receives payment in pounds sterling, and converts the currency to U.S. dollars at the spot rate. The company’s year-end is December 31. 59.
60.
61.
Topic: Cash flow hedge of forecasted sale: options LO 2 When the options are adjusted to their December 31, 2023 market value, what is the effect on sales revenue? a. b. c. d.
$200 increase $500 increase $200 decrease $300 decrease
ANS:
c The intrinsic value of the options increases from $2,000 (= ($1.40 - $1.38) x £100,000) to $2,500 (= ($1.40 - $1.375) x £100,000). The options increase in value by $300, so time value must decline by $200, reducing sales revenue.
Topic: Cash flow hedge of forecasted sale: options LO 2 When the options are adjusted to their December 31, 2023 market value, what is the net debit (credit) to other comprehensive income? a. b. c. d.
$(500) $(600) $ 500 $ 600
ANS:
a The $500 (= $2,500 - $2,000) increase in intrinsic value adds to OCI.
Topic: Cash flow hedge of forecasted sale: options LO 2 What amount is reported as sales revenue during 2024? Note that this amount includes effects of the hedge as well as the merchandise sale. a. b. c. d.
$137,300 $138,000 $135,000 $137,700
©Cambridge Business Publishers, 2023 9-20
Advanced Accounting, 5th Edition
ANS:
a Entries in 2024 are: Investment in options Sales revenue
1,800 700 Gain on cash flow hedge (OCI)
Cash Reclassification of gain on cash flow hedge (OCI)
2,500 135,000 3,000
Sales revenue
138,000
$138,000 - $700 = $137,300. 62.
63.
Topic: Cash flow hedge of forecasted sale: options LO 2 Assume changes in time value are reported in other comprehensive income and straight-line amortized as adjustments to sales revenue, rather than affecting income as incurred. When the options are adjusted to their December 31, 2023 market value, what is the net effect on sales revenue? a. b. c. d.
$(500) $(600) $ 500 $ 600
ANS:
b The $900 option cost is reclassified on a straight-line basis as a reduction in sales revenue. $600 = $900 x 2/3.
Topic: Cash flow hedge of forecasted sale: options LO 2 Assume changes in time value are reported in other comprehensive income and straight-line amortized as adjustments to sales revenue, rather than affecting income as incurred. What amount is reported as sales revenue during 2024? Note that this amount includes effects of the hedge as well as the merchandise sale. a. b. c. d.
$137,300 $138,000 $135,000 $137,700
ANS:
d Entries in 2024 are: Investment in options
1,800 Gain on cash flow hedge (OCI)
Sales revenue
1,800 300
Reclassification of option time value (OCI)
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-21
300
Cash Reclassification of gain on cash flow hedge (OCI)
135,000 3,000 Sales revenue
138,000
$138,000 - $300 = $137,700. 64.
65.
Topic: Interest rate swaps LO 3 Which of the following is a fair value hedge? a. b. c. d.
A hedge of a forecasted purchase transaction A receive fixed/pay variable interest rate swap A receive variable/pay fixed interest rate swap A hedge of a forecasted sale transaction
ANS:
b
Topic: Interest rate swaps LO 3 A company has a receive fixed/pay variable interest rate swap that qualifies as an effective hedge of its fixed rate debt. If interest rates rise: a. b.
66.
c. d.
The gain on the debt and the loss on the swap are reported in income. The change in the value of the swap is reported in other comprehensive income and adjusts future interest expense recognized on the debt. The loss on the debt and the gain on the swap are reported in income. The swap is written off.
ANS:
a
Topic: Interest rate swaps LO 3 A company has a receive variable/pay fixed interest rate swap that qualifies as an effective hedge of its variable rate debt. When it enters the swap agreement, it records the swap investment at what amount? a. b. c. d.
The sum of expected swap receipts/payments. The expected swap receipt/payment for the coming year. The present value of expected swap receipts/payments. No entry is recorded until swap receipts/payments are made.
ANS:
c
©Cambridge Business Publishers, 2023 9-22
Advanced Accounting, 5th Edition
67.
68.
69.
70.
Topic: Interest rate swaps LO 3 A company enters a receive variable/pay fixed interest rate swap, and the market interest rate increases. Which of the following statements is true from the company’s perspective? a. b. c. d.
The market value of the swap increases. The swap is considered a fair value hedge. Changes in the value of the swap are reported in current earnings. There is no change in the market value of the swap.
ANS:
a
Topic: Interest rate swaps LO 3 A company has variable rate debt. It swaps the variable payments for fixed payments. If interest rates decline during the year: a. b. c. d.
The loss on the swap and the gain on the fixed rate debt are reported in income. The gain on the swap and the loss on the fixed rate debt are reported in income. The gain on the swap is reported in other comprehensive income. The loss on the swap is reported in other comprehensive income.
ANS:
d
Topic: Interest rate swaps LO 3 A company has $1,000,000 in variable rate debt, at a current rate of 2.1%. The rate is reset annually, and interest for the current year is due at the time the rate is reset for the following year. For the current year, the company swaps its variable payments for fixed payments of 2.3%. At the end of the current year, the company makes the variable rate payment of $21,000 on the debt. For the net receipt/payment of $2,000 on the swap, the company a. b. c. d.
Credits cash and debits loan payable. Debits cash and credits loan payable. Credits cash and debits investment in swap. Debits cash and credits investment in swap.
ANS:
c
Topic: Interest rate swaps LO 3 A company has fixed rate debt. It swaps the fixed payments for variable payments. If the company uses hedge accounting for the swap, how does the accounting differ from normal accounting? a. b. c. d.
Changes in the market value of the swap are reported in income. Changes in the market value of the debt are reported in income. Changes in the market value of the swap are reported in other comprehensive income. Changes in the market value of the debt are not reported.
ANS:
b
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-23
71.
Topic: Interest rate swaps LO 3 A company has fixed rate debt and enters a receive fixed/pay variable swap. Interest expense equals: a. b. c. d. ANS:
72.
The fixed rate interest adjusted for amounts reclassified from other comprehensive income The variable rate interest adjusted for amounts reclassified from other comprehensive income The fixed rate interest adjusted for the net cash paid to or received from the intermediary The variable rate interest adjusted for the net cash paid to or received from the intermediary c
Topic: Interest rate swaps LO 3 A company with fixed rate debt swaps the fixed interest payments on the debt for variable payments. The company’s adjusting entries to report the impact of an interest rate increase will include: a. b. c. d.
A debit to other comprehensive income A credit to gain on debt A debit to swap investment A credit to other comprehensive income
ANS:
b The debt is marked to market by debiting the liability and crediting gain on debt. The swap is marked to market by debiting loss on swap and crediting swap investment.
Use the following information to answer Questions 73 – 75. A company has $1,000,000 in 2.5% fixed rate debt, with interest due on December 31 of each year. On January 1 it swaps its fixed interest payments for variable payments at the Treasury bill rate plus 0.7%. The current Treasury bill rate is 1.5%. The swap qualifies as a fair value hedge of the fixed payments. The company’s accounting year ends December 31, and all income effects of the loan and the swap are reported in interest expense. On December 31, the Treasury bill rate has declined to 1.3%, reducing the variable payments on the swap for the following year. The swap value and the loan value each change by $60,000. 73.
Topic: Interest rate swap: fair value hedge LO 3 The company’s net cash flow on the swap for the current year is a. b. c. d.
$3,000 inflow $3,000 outflow $10,000 inflow $10,000 outflow
©Cambridge Business Publishers, 2023 9-24
Advanced Accounting, 5th Edition
ANS:
74.
75.
a The company receives the 2.5% fixed rate to pay interest on the loan, and pays (1.5% + 0.7%) = 2.2% variable rate on the swap, for a net cash inflow of 0.3% x $1,000,000 = $3,000.
Topic: Interest rate swap: fair value hedge LO 3 The company reports interest expense for the current year in the amount of a. b. c. d.
$25,000 $28,000 $22,000 $ 3,000
ANS:
c 2.2% x $1,000,000 = $22,000.
Topic: Interest rate swap: fair value hedge LO 3 The change in the value of the loan a. b. c. d.
Reduces interest expense. Increases other comprehensive income. Increases interest expense. Is not recorded.
ANS:
c The decline in interest rates increases the market value of the loan, resulting in a loss, which is reported in interest expense.
Use the following information to answer Questions 76 – 79. A company has $1,000,000 in variable rate debt, with interest due on December 31 of each year. Interest is set at the Treasury bill rate plus 1.2%. The principal of the loan is due December 31, 2025. On January 1, 2024, the company enters a two-year receive variable/pay fixed interest rate swap, at a fixed rate of 2.2%. The swap is settled at the end of each year. The Treasury bill rate for 2024 is 0.8%, and it is 0.7% in 2025. The company records the swap at the expected future receipts/payments, equal to the receipt/payment for the current year, discounted at the variable rate. The swap qualifies as a cash flow hedge of the variable interest payments, and income effects of the debt and the swap are reported in interest expense. 76.
Topic: Interest rate swap: cash flow hedge LO 3 On January 1, 2024, the company records the swap agreement as a(n) a. b. c. d.
asset of $3,883. asset of $3,561. liability of $3,561. liability of $3,883.
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-25
ANS:
77.
78.
79.
d Expected payments are (2.2% - 2.0%) x $1,000,000 = $2,000 per year for two years, discounted at 2.0%. ($2,000/1.02) + ($2,000/1.022) = $3,883 liability.
Topic: Interest rate swap: cash flow hedge LO 3 The company records interest expense for 2024 in the amount of a. b. c. d.
$2,000. $20,000. $22,000. $18,000.
ANS:
c Interest expense is recorded at the fixed rate of 2.2% x $1,000,000 = $22,000.
Topic: Interest rate swap: cash flow hedge LO 3 At the end of 2024, the company adjusts the swap to its current value. The effect on other comprehensive income is a a. b. c. d.
debit of $1,061. credit of $883. debit of $3,000. credit of $56.
ANS:
a The new payment is (2.2% - 1.9%) = $3,000 due at the end of the year, discounted at 1.9%. $3,000/1.019 = $2,944 liability. The swap has a liability balance of $3,883 - $2,000 = $1,883, before adjustment to its end-of-year market value. The adjustment increases the liability by ($2,944 - $1,883) = $1,061, reducing other comprehensive income.
Topic: Interest rate swap: cash flow hedge LO 3 On December 31, 2025, the company records its variable rate cash payment to the holder of the loan at the variable rate, debiting interest expense. The entry to adjust interest expense to its correct amount involves a $3,000 a. b. c. d.
credit to interest expense. credit to other comprehensive income. debit to loan payable. debit to other comprehensive income.
ANS:
b The cash payment is 1.9% x $1,000,000 = $19,000, but the company is actually paying 2.2% x $1,000,000 = $22,000. Interest expense is debited, and other comprehensive income is credited for $3,000.
©Cambridge Business Publishers, 2023 9-26
Advanced Accounting, 5th Edition
80.
81.
Topic: Disclosure requirements for derivatives and hedging LO 4 U.S. GAAP requires disclosure of the impact of hedges on income, classified in these categories: a. b. c. d.
effective hedges and noneffective hedges futures, options, and swaps domestic and international hedges fair value hedges and cash flow hedges
ANS:
d
Topic: Disclosure requirements for derivatives and hedging LO 4 Which one of the following derivatives and hedging disclosures is required by U.S. GAAP? a. b.
82.
c. d.
Impact on income of unhedged financial risk Amounts of hedging gains and losses permanently classified in accumulated other comprehensive income Gains and losses on derivatives reported in income and other comprehensive income Degree of effectiveness of hedges, classified into fair value and cash flow categories
ANS:
c
Topic: Disclosure requirements for derivatives and hedging LO 4 Which one of the following derivatives and hedging disclosures is not required by U.S. GAAP? a. b. c.
83.
d.
Net gain or loss recognized in earnings from fair value and cash flow hedges Maximum length of time covered by cash flow hedges of forecasted transactions Net gain or loss on foreign currency hedges reported in accumulated other comprehensive income Total risk, and percentage of risk hedged, by hedge type
ANS:
d
Topic: Disclosure requirements for derivatives and hedging LO 4 Which one of the following derivatives and hedging disclosures is not required to be disclosed in tabular format by U.S. GAAP? a.
c. d.
Amounts of gains or losses for the year on derivatives used for hedging, and where reported on the income statement. Percentage of hedging goals achieved, shown separately for fair value and cash flow hedges. Fair values of derivatives on hand at year-end, and where reported on the balance sheet. Gains and losses on derivatives not qualifying for hedge accounting, by type of derivative.
ANS:
b
b.
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-27
84.
Topic: IFRS for derivatives and hedging LO 5 Which item below is reported differently using U.S. GAAP versus IFRS for derivatives and hedging? a. b. c.
85.
86.
87.
d.
Changes in the intrinsic value of options used as fair value hedges of inventory. Designation of interest rate swaps as cash flow hedges or fair value hedges. Changes in the intrinsic value of fair value interest rate swaps used to hedge fixed rate obligations. Reporting alternatives for option time value.
ANS:
d
Topic: IFRS for derivatives and hedging LO 5 IFRS 9 requires that changes in the value of hedges of equity investments reported at FV-OCI be reported: a. b. c. d.
In other comprehensive income until the equity investments are sold. In other comprehensive income, with no reclassification to income. In income as incurred. As a direct adjustment to retained earnings.
ANS:
b
Topic: IFRS for derivatives and hedging LO 5 An IFRS company has 1,000 bushels of soybeans in its inventory and hedges the price risk of this inventory with a short futures contract locking in the selling price of 1,000 bushels of soybeans. As time passes, changes in the value of the inventory are not exactly offset by changes in the value of the futures contract because a. b. c. d.
The futures value consists of time value, which changes with time. Spot rates and futures rates do not change by the same amount over time. The inventory remains at cost while the futures are valued at market. The inventory is revalued at the balance sheet date and the futures are revalued on a daily basis.
ANS:
b
Topic: IFRS for derivatives and hedging LO 5 The difference between futures and spot rates is called a. b. c. d.
Discount Premium Basis Strike price
ANS:
c
©Cambridge Business Publishers, 2023 9-28
Advanced Accounting, 5th Edition
88.
Topic: IFRS for derivatives and hedging LO 5 IFRS 9 requires that the change in time value of options used to hedge the value of an inventory balance be reported: a. b. c.
89.
d.
In other comprehensive income and amortized to income over time. In other comprehensive income, with no reclassification to income. In income as incurred or in other comprehensive income and amortized to income over time. As an adjustment to the carrying value of the hedged item.
ANS:
a
Topic: IFRS for derivatives and hedging LO 5 IFRS 9 requires that the change in time value of options used to hedge the forecasted purchase of equipment be reported: a. b. c.
90.
d.
In other comprehensive income and amortized to income over time. In other comprehensive income, with no reclassification to income. In income as incurred or in other comprehensive income and amortized to income over time. As an adjustment to the carrying value of the equipment.
ANS:
d
Topic: IFRS for derivatives and hedging LO 5 IFRS 9 requires that the difference between the spot and futures price of futures used to hedge the value of an inventory balance be reported: a. b. c. d.
In other comprehensive income and amortized to income over time. In other comprehensive income, with no reclassification to income. In income as incurred or in other comprehensive income and amortized to income over time. As an adjustment to the carrying value of the hedged item.
ANS:
c
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-29
PROBLEMS 1.
Topic: Fair value hedge of inventory: futures LO 1 A company has a soybean inventory carried at cost, $500,000. The market value of the inventory is currently $600,000. The company hedges against a decline in the market value of the inventory by taking a short position in soybeans, locking in a 60-day futures price of $600,000. The position requires a margin deposit of $10,000, and the hedge qualifies as a fair value hedge of the soybean inventory. Fifty days later, the market value of the inventory is $585,000, the 10-day futures price is $616,000, and the company closes its short position. The company sells its soybean inventory a few days later for $587,000 in cash. All events occur within the company’s accounting year and income effects are reported in cost of goods sold. Required Make the required journal entries to record the above events. ANS: Investment in futures
10,000 Cash
Investment in futures
10,000 16,000
Cost of goods sold Cost of goods sold
16,000 15,000
Inventory Cash
15,000 26,000
Investment in futures Cash
26,000 587,000
Sales revenue Cost of goods sold
587,000 485,000
Inventory 2.
485,000
Topic: Fair value hedge of inventory: futures LO 1 On June 1, a company holds an inventory of a commodity that it expects to sell in two months. It paid $600,000 for the inventory, and the company carries it at cost. To hedge the price risk on this inventory, the company takes a short futures position in the commodity, for delivery on August 1, paying a margin deposit of $400. The company’s accounting year ends December 31, and the futures qualify as a fair value hedge of the commodity inventory. The company closes its futures position on August 1 and sells the inventory on August 2 for $585,000. All income effects are reported in cost of goods sold, and basis differences are reported in income as incurred. Spot and futures values for the commodity are: Futures Price for Spot Price August 1 Delivery June 1 $ 590,000 $ 591,000 August 1 585,000 585,000
©Cambridge Business Publishers, 2023 9-30
Advanced Accounting, 5th Edition
Required a. How much cash will the company receive or pay on August 1, when it closes its futures position? b. Prepare the entries to record the above events. c. What is the company’s gross margin, including effects of the sale and the hedge? What was the expected gross margin on June 1? Were the futures effective? Explain. ANS: a. b.
$591,000 - $585,000 + $400 = $6,400 received June 1 Investment in futures
400 Cash
400
August 1 Investment in futures
6,000 Cost of goods sold
6,000
$591,000 – $585,000 = $6,000 Cost of goods sold
5,000 Inventory
5,000
$590,000 – $585,000 = $5,000 Cash
6,400 Investment in futures
August 2 Cash, receivables
6,400
585,000 Sales revenue
Cost of goods sold
585,000 595,000
Inventory
595,000
$600,000 - $5,000 = $595,000 c.
$585,000 – (-$6,000 + $5,000 + $595,000) = $(9,000) The expected gross margin on June 1 was $590,000 - $600,000 = $(10,000). Without the hedge the gross margin would have been $585,000 - $600,000 = $(15,000). The futures maintained the expected gross margin and in addition improved it by $1,000 due to the difference in basis ($591,000 - $590,000).
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-31
3.
Topic: Fair value hedge of inventory: futures LO 1 On December 1, 2023, a calendar-year company owns 10,000 lbs. of a commodity carried at a cost of $200,000, that it expects to sell on January 31, 2024 in the normal course of business. The company hedges its price risk on this commodity by selling commodity futures for delivery on January 31, 2024. The position requires a $2,000 margin deposit. The company closes its futures position on January 31, 2024 and sells the commodity to a customer for cash at the spot price. Spot and futures prices/lb. for the commodity are: Futures Price for Spot Price January 31, 2024 Delivery December 1, 2023 $21.00 $21.05 December 31, 2023 20.25 20.35 January 31, 2024 19.90 19.90 Required Prepare the journal entries to record the above events, including adjusting entries at December 31. The futures qualify as a fair value hedge of the commodity inventory, and all income effects are reported in cost of goods sold. Basis differences are reported in income as incurred. ANS: December 1, 2023 Investment in futures
2,000 Cash
December 31, 2023 Investment in futures
2,000
7,000 Cost of goods sold
7,000
($21.05 - $20.35) x 10,000 = $7,000 Cost of goods sold
7,500 Inventory
7,500
($21.00 - $20.25) x 10,000 = $7,500 January 31, 2024 Investment in futures
4,500 Cost of goods sold
4,500
($20.35 - $19.90) x 10,000 = $4,500 Cost of goods sold
3,500 Inventory
3,500
($20.25 - $19.90) x 10,000 = $3,500 Cash
13,500 Investment in futures
Cash
13,500 199,000
Sales revenue Cost of goods sold
189,000 Inventory
©Cambridge Business Publishers, 2023 9-32
199,000
189,000 Advanced Accounting, 5th Edition
4.
Topic: Fair value hedge of inventory: futures LO 1 On November 1, 2023, a calendar-year company owns 100,000 units of inventory carried at a cost of $1,300,000, that it expects to sell on March 1, 2024 in the normal course of business. The company hedges its price risk on this inventory by selling futures for delivery on March 1, 2024. The position requires a $1,000 margin deposit. The company closes its futures position on March 1, 2024 and sells the inventory for cash at the spot price. Spot and futures prices/unit are: Futures Price for Spot Price March 1, 2024 Delivery November 1, 2023 $15.00 $15.05 December 31, 2023 14.55 14.30 March 1, 2024 14.20 14.20 Required Prepare the journal entries to record the above events, including adjusting entries at December 31. The futures qualify as a fair value hedge of the commodity inventory, and all income effects are reported in cost of goods sold. Basis differences are reported in income as incurred. ANS: November 1, 2023 Investment in futures
1,000 Cash
December 31, 2023 Investment in futures
1,000
75,000 Cost of goods sold
75,000
($15.05 - $14.30) x 100,000 = $75,000 Cost of goods sold
45,000 Inventory
45,000
($15.00 - $14.55) x 100,000 = $45,000 March 1, 2024 Investment in futures
10,000 Cost of goods sold
10,000
($14.30 - $14.20) x 100,000 = $10,000 Cost of goods sold
35,000 Inventory
35,000
($14.55 - $14.20) x 10,000 = $35,000 Cash
86,000 Investment in futures
Cash
86,000 1,420,000
Sales revenue Cost of goods sold
1,220,000 Inventory
Test Bank, Chapter 9
1,420,000
1,220,000 ©Cambridge Business Publishers, 2023 9-33
5.
Topic: Fair value hedge of inventory with alternative basis reporting: futures LO 1 On November 1, 2023, a calendar-year company owns 100,000 units of inventory carried at a cost of $1,300,000, that it expects to sell on March 1, 2024 in the normal course of business. The company hedges its price risk on this inventory by selling futures for delivery on March 1, 2024. The position requires a $1,000 margin deposit. The company closes its futures position on March 1, 2024 and sells the inventory for cash at the spot price. Spot and futures prices/unit are: Futures Price for Spot Price March 1, 2024 Delivery November 1, 2023 $15.00 $15.05 December 31, 2023 14.55 14.30 March 1, 2024 14.20 14.20 Required a. Calculate the total basis difference for this hedging arrangement. b. Prepare the journal entries to record the above events, including adjusting entries at December 31. The futures qualify as a fair value hedge of the commodity inventory, and all income effects are reported in cost of goods sold. Basis differences are reported in other comprehensive income as incurred, and straight-line amortized as an adjustment to cost of goods sold. ANS: a.
($15.05 - $15) x 100,000 = $5,000
b. November 1, 2023 Investment in futures
1,000 Cash
December 31, 2023 Investment in futures
1,000
75,000
Cost of goods sold Gain on cash flow hedge (OCI) ($15.05 - $14.30) x 100,000 = $75,000; ($15.00 - $14.55) x 100,000 = $45,000 Cost of goods sold
45,000 30,000
45,000 Inventory
Reclassification of gain on cash flow hedge (OCI)
45,000
2,500 Cost of goods sold
2,500
($5,000/4) x 2 = $2,500
©Cambridge Business Publishers, 2023 9-34
Advanced Accounting, 5th Edition
March 1, 2024 Investment in futures Loss on cash flow hedge (OCI)
10,000 25,000
Cost of goods sold ($14.30 - $14.20) x 100,000 = $10,000; ($14.55 - $14.20) x 100,000 = $35,000 Cost of goods sold
35,000
35,000 Inventory
Reclassification of gain on cash flow hedge (OCI)
35,000
2,500 Cost of goods sold
2,500
($5,000/4) x 2 = $2,500 Cash
86,000 Investment in futures
Cash
86,000 1,420,000
Sales revenue Cost of goods sold
1,220,000 Inventory
6.
1,420,000
1,220,000
Topic: Fair value hedge of AFS investments: stock index futures LO 1 A company has investments in debt securities classified as available-for-sale. The January 1, 2023 balance sheet carries these investments, originally purchased at a cost of $3,500,000, at $3,800,000. To protect against anticipated declines in the value of these investments, the company takes a short position in stock index futures, at a price of $3,805,000, that are highly correlated with the value of its investments. The futures qualify as a fair value hedge of the securities investment. No margin deposit is required. When the books are closed on December 31, 2023, the market value of the investments is $3,775,000, and the company closes out its short position at the futures price of $3,780,000. Required a. Prepare the entry to record closing the futures, and the adjusting entry required at December 31, 2023. The company records all income effects in other gains (losses), and basis differences are reported in income as incurred. b. At what amount will the AFS investments appear on the company’s December 31, 2023 balance sheet? c. The company sells the AFS investments on January 5, 2024 for $3,772,000. Prepare the journal entry to record the sale. d. What is the total net gain (loss) on holding the securities and the hedge? How much of this gain (loss) is reported in 2023? In 2024?
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-35
ANS: a. Cash
25,000 Other gains (income)
25,000
$3,805,000 – $3,780,000 = $25,000 Other losses (income)
25,000 Investment in securities
25,000
$3,800,000 – $3,775,000 = $25,000 b.
$3,775,000, since AFS investments are always carried at market value.
c. Cash Reclassification of gain on AFS securities (OCI)
3,772,000 300,000 Investment in securities Other gains (income)
d.
7.
3,775,000 297,000
The gain on holding the securities is $3,772,000 - $3,500,000 = $272,000 The gain on the futures is $3,805,000 - $3,780,000 = $25,000 Total gain = $272,000 + $25,000 = $297,000 Loss recognized in 2023 = $25,000 - $25,000 = $0 (spot and futures price changes offset) Gain recognized in 2024 = $297,000
Topic: Fair value hedge of firm liability commitment: interest rate futures LO 1 On January 1, 2024, a December 31 year-end company contracts with a financial institution to roll over $1,000,000 face value of its notes payable every 91 days at the Treasury bill rate plus 1.4%. The current annual interest rate on U.S. Treasury bills is 1.2%. The yield on Treasury bills is highly correlated with the yield on the company's floating rate term loans. To hedge against a possible interest rate increase, on January 1, 2024 the company sells short $1,000,000 face value of 91-day Treasury bill (interest rate) futures at 98.8 (1.2% annual discount yield), and deposits $300 cash with the broker as margin. The futures qualify as a fair value hedge of the firm commitment to roll over the notes. At the end of the 91-day period (April 2, 2024), the futures price has risen to 99.2 (0.8% annual discount yield) and the company closes out its short position. It rolls over its notes at the agreed-upon rate of 2.2% (= 1.4% + 0.8%). All income effects of the notes and the futures are reported in interest expense. Required a. What rate does the company pay on the notes during the period January 1 through April 1, 2024? b. Record the entries necessary on January 1 to record the futures position, and April 2, when the short position is closed out and the loan is rolled over. c. Prepare the journal entry to record interest expense for the three months starting April 2. What is the effective annual interest rate during this period? d. In hindsight, should the company have invested in the futures contract? Explain.
©Cambridge Business Publishers, 2023 9-36
Advanced Accounting, 5th Edition
ANS:
a.
1.2% + 1.4% = 2.6%
b.
January 1 Investment in futures
300 Cash
300
April 2 Interest expense
1,000
Investment in futures Cash (0.988 - 0.992) x $1,000,000 x 1/4 = $1,000 loss Firm commitment
300 700
1,000 Interest expense
1,000
Notes payable (old) Notes payable discount (new)
1,000,000 1,000 Notes payable (new) Firm commitment
1,000,000 1,000
c. Interest expense
6,500
Notes payable discount Cash 2.2% x ¼ x $1,000,000 = $5,500 cash payment
1,000 5,500
Effective rate = ($6,500/$1,000,000) x 4 = 2.6% d.
8.
In hindsight, the hedge was not a good idea since without it the company would be paying a 2.2% annual rate rather than 2.6% on the new loan. The hedge was effective in locking in the old rate; unfortunately, hedges using futures prevent a company from experiencing positive as well as negative events.
Topic: Fair value hedge of firm liability commitment: interest rate futures LO 1 On July 1, 2024, a company borrows $1,000,000 at a variable rate of prime plus 1.5%, to be renewed every three months. Interest is payable upon renewal. Prime is 0.5% on July 1. The company hedges against increases in interest rates by selling short $1,000,000 face value of three-month Treasury bill (interest rate) futures at 99.5. The margin deposit is $300. The futures qualify as a fair value hedge of the firm commitment to roll over the loan. On October 1, prime is 1.0% and the futures price is 99.0. The company closes out its futures position and rolls over the loan as agreed. The company has a June 30 fiscal year-end and reports all income effects of the loan and the futures in interest expense.
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-37
Required a. What rate does the company pay on the notes during the 3-month period beginning July 1? b. Prepare the entries necessary on July 1 to record the futures position, and October 1, when the short position is closed out and the loan is rolled over. c. Prepare the journal entry to record interest expense for the three months starting October 1. What is the effective annual interest rate during this period? d. In hindsight, should the company have invested in the futures contract? Explain. ANS: a. b.
0.5% + 1.5% = 2.0% July 1 Investment in futures
300 Cash
300
October 1 Interest expense
5,000 Cash
5,000
2% x $1,000,000 x 1/4 = $5,000 Cash
1,550
Investment in futures Interest expense (0.995 – 0.99) x $1,000,000 x 1/4 = $1,250 gain
300 1,250
Interest expense
1,250 Firm commitment
1,250
Notes payable (old) Firm commitment
1,000,000 1,250 Notes payable (new) Notes payable premium (new)
1,000,000 1,250
c. Interest expense Notes payable premium
5,000 1,250
Cash $6,250 = (.01 + .015) x $1,000,000 x 1/4
6,250
($5,000 /$1,000,000) x 4 = 2% annual rate d.
The hedge was a good idea since without it the company would be paying a 2.5% annual rate rather than 2% on the new loan. The hedge was effective in locking in the old lower rate.
©Cambridge Business Publishers, 2023 9-38
Advanced Accounting, 5th Edition
9.
Topic: Fair value hedge of firm sale commitment: commodity futures LO 1 On January 1, a company receives a purchase order from a customer for 1,000,000 lbs. of a commodity, to be delivered in 90 days at the spot rate prevailing on the delivery date. The company sells 1,000,000 lbs. of commodity futures at a price of $3/lb. for delivery in 90 days, as a hedge of the sale proceeds, and pays a margin deposit of $30,000. The futures qualify as a fair value hedge of the sales commitment, and income effects of the sale and the futures are reported in sales revenue. On April 1, the company settles the futures contract and delivers the commodity to the customer at the current spot rate of $2.92/lb. Required Prepare the journal entries to record the events of January 1 and April 1. The company’s accounting year ends December 31. ANS:
January 1 Investment in futures
30,000 Cash
30,000
April 1 Investment in futures
80,000
Sales revenue $80,000 = ($3.00 - $2.92) x 1,000,000.
80,000
Sales revenue
80,000 Firm commitment
Cash
80,000 110,000
Investment in futures
Cash Firm commitment
2,920,000 80,000 Sales revenue
10.
110,000
3,000,000
Topic: Cash flow hedge of forecasted purchase: commodity futures LO 1 A company expects to purchase 1,000,000 lbs. of a commodity in 30 days for resale to customers. To guard against potential increases in the cost of this commodity, the company purchases 1,000,000 lbs. of the commodity for delivery in 30 days at $2.00/lb., paying a margin deposit of $500 on the futures contract. The hedge qualifies as a hedge of the forecasted purchase. After 30 days, the futures price converges to the spot price of $2.06/lb. and the company closes out its long futures position. The company purchases 1,000,000 lbs. of the commodity on the spot market and subsequently sells the commodity to a customer for $2.07/lb. All income effects of the commodity inventory and the hedge are reported in cost of goods sold. Required a. Prepare the journal entries necessary to record the above events. b. Was this hedge effective? Explain.
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-39
ANS: a. Investment in futures
500 Cash
Cash
500 60,500
Investment in futures Gain on cash flow hedge (OCI) Gain on futures position = ($2.06 - $2.00) x 1,000,000 = $60,000 Inventory
500 60,000
2,060,000 Cash, payables
Cash, receivables
2,060,000 2,070,000
Sales revenue Cost of goods sold Reclassification of gain on cash flow hedge (OCI)
2,000,000 60,000 Inventory
b.
11.
2,070,000
2,060,000
Yes, the hedge was effective in maintaining the expected gross margin on the forecasted sale. The company records cost of goods sold at $2,000,000, which is the $2.00/lb. market cost when orders were forecasted to occur. Although market cost rose to $2.06 when the company actually purchased the commodity for resale, the futures contract gain of $60,000 offset this cost increase.
Topic: Cash flow hedge of forecasted sale: commodity futures LO 1 A company expects to sell 1,000,000 lbs. of a commodity in 90 days. To guard against potential declines in the price of this commodity, the company sells 1,000,000 lbs. of the commodity for delivery in 90 days at $4.00/lb., paying a margin deposit of $8,000 on the futures contract. The hedge qualifies as a hedge of the forecasted sale. At the company’s year-end, 30 days later, the 60-day futures price is $4.02/lb. and the company pays cash to the broker to maintain its investment account at $8,000. 60 days later, the futures price converges to the spot price of $3.97/lb. and the company closes out its short futures position. The company sells 1,000,000 lbs. of the commodity on the spot market. All income effects of the commodity sale and the hedge are reported in sales revenue. Required Prepare the journal entries necessary to record the above events, including year-end adjusting entries.
©Cambridge Business Publishers, 2023 9-40
Advanced Accounting, 5th Edition
ANS: Investment in futures
8,000 Cash
8,000
Year-end Loss on cash flow hedge (OCI)
20,000
Cash Loss on futures position = ($4.02 - $4.00) x 1,000,000 = $20,000
20,000
60 days later Cash
58,000
Investment in futures Gain on cash flow hedge (OCI) Gain on futures position = ($4.02 - $3.97) x 1,000,000 = $50,000 Cash, receivables Reclassification of gain on cash flow hedge (OCI)
8,000 50,000
3,970,000 30,000 Sales revenue
12.
4,000,000
Topic: Cash flow hedge of a short-term loan: interest rate futures LO 1 On January 1, a company with a December 31 year-end issues $1,000,000 in 3-month 1.5% notes. The company wants to hedge against higher interest rates when it renews its notes on April 1, so on January 1 the company sells short $1,000,000 in Treasury bill futures, due in 3 months, at 99.0. The futures are a qualified cash flow hedge of the forecasted renewal of the notes. There is no margin deposit. The market interest rate increases to 2.1% on April 1, the company closes out its futures position at 98.4 and issues new notes at 2.1%. Required a. Compute the gain or loss on the futures contract for the 3-month period beginning January 1. b. On April 1, the company closes its position and settles with the broker. Prepare the journal entry to record this transaction. c. Prepare the journal entry to report the company’s interest expense for the 3-month period beginning April 1, and compute its effective interest rate on the notes for that period. ANS: a.
(0.99 - 0.984) x $1,000,000 x 1/4 = $1,500 gain
b. Cash
1,500 Gain on cash flow hedge (OCI)
Test Bank, Chapter 9
1,500
©Cambridge Business Publishers, 2023 9-41
c. Interest expense Reclassification of gain on cash flow hedge (OCI)
3,750 1,500 Cash
5,250
$5,250 = 2.1% x $1,000,000 x 1/4 ($3,750/$1,000,000) x 4 = 1.5% effective rate on the new notes; the futures allow the company to maintain the lower rate from the previous period. 13.
Topic: Cash flow hedge of a short-term loan: interest rate futures LO 1 On January 1, a calendar-year company issues $1,000,000 in 3-month 3% notes and plans to reissue the notes in 3 months at the prevailing market interest rate. To hedge against rising interest rates, the company sells short $1,000,000 in Treasury bill futures, due in 3 months, at 97.5. The futures are a qualified cash flow hedge of the forecasted renewal of the notes. There is no margin deposit. The market interest rate for the company’s level of risk declines to 2.8% on April 1, the company closes out its futures position at 97.7 and issues new notes at 2.8%. Required a. Compute the gain or loss on the futures contract for the 3-month period beginning January 1. b. On April 1, the company closes its position and settles with the broker. Prepare the journal entry to record this transaction. c. Prepare the journal entry to report interest expense for the 3-month period beginning April 1 and compute its effective interest rate on the notes for that period. ANS: a.
(0.977 - 0.975) x $1,000,000 x 1/4 = $500 loss
b. Loss on cash flow hedge (OCI)
500 Cash
500
c. Interest expense
7,500 Reclassification of loss on cash flow hedge (OCI) Cash
500 7,000
$7,000 = 2.8% x $1,000,000 x 1/4 ($7,500/$1,000,000) x 4 = 3.0% effective rate on the new notes; the futures require the company to maintain the higher rate from the previous period.
©Cambridge Business Publishers, 2023 9-42
Advanced Accounting, 5th Edition
Use the following information to answer questions 14 and 15 below. On February 1, a company holds inventory carried at a cost of $2,000,000. The current market value of the inventory is $2,300,000. To maintain the current gross margin of $300,000, the company purchases put options with a total strike price of $2,300,000 exercisable in 2 months, paying a total of $3,000 for the options. The options qualify as a fair value hedge of the inventory, and changes in option time value are reported in income as incurred. All income effects of the inventory and the hedge are reported in cost of goods sold. On March 15, the market price of the inventory is $2,200,000 and the company closes the hedge by selling the options for $100,500. The company sells its inventory later in the year for $2,250,000. The company has a December 31 year-end. 14.
Topic: Fair value hedge of commodity inventory: put options LO 2 Required Prepare the journal entries to record the following events: a. b. c.
Purchase of the puts Closing of the hedge, including related adjusting entries Sale of the inventory, assuming a perpetual inventory system
ANS: a. Investment in options
3,000 Cash
3,000
b. Investment in options
97,500 Cost of goods sold
97,500
$100,500 - $3,000 = $97,500 Cost of goods sold
100,000 Inventory
100,000
$2,300,000 - $2,200,000 = $100,000 Cash
100,500 Investment in options
100,500
c. Cash, receivables
2,250,000 Sales revenue
Cost of goods sold
2,250,000 1,900,000
Inventory
1,900,000
$2,000,000 - $100,000 = $1,900,000
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-43
15.
Topic: Fair value hedge of commodity inventory: put options LO 2 Now assume the company sells the inventory for $2,200,000 immediately after selling the put options. Required a. Calculate the gross margin on the sale of the commodity under each of these conditions: i. The company did not hedge with the put options. ii. The company did hedge with the put options. b. Compare the gross margin achieved while hedging with the expected gross margin as of February 1. Is the expected gross margin maintained using the hedge? Explain any discrepancy. ANS: a.
i.
Gross margin with no hedging: Sales Cost of goods sold Gross margin
ii.
$2,200,000 2,000,000 $ 200,000
Gross margin with hedging: Sales $2,200,000 Cost of goods sold (1) 1,902,500 Gross margin $ 297,500 (1) $1,902,500 = $1,900,000 - $97,500 + $100,000
b.
Expected margin at February 1 = $2,300,000 - $2,000,000 = $300,000. The put options yield a gross margin of $297,500 rather than the $300,000 expected on February 1. The change in option intrinsic value is a perfect hedge of the change in value of the inventory. The difference is caused by the decline in time value of $2,500, which adds to cost of goods sold. The hedge originally had a time value of $3,000 (not in the money) and had a time value of $500 on March 15 (= $100,500 – ($2,300,000 $2,200,000)).
©Cambridge Business Publishers, 2023 9-44
Advanced Accounting, 5th Edition
16.
Topic: Fair value hedge of inventory: put options LO 2 A company holds inventory carried at cost, $100,000. The inventory has a current market value of $105,000. To hedge against possible declines in the value of the inventory, the company pays $200 for put options with a strike price of $105,000. The options qualify as a fair value hedge of the inventory. Changes in option time value are reported in income as incurred. All income effects of the inventory and the hedge are reported in cost of goods sold. Before the options expire, the company sells the inventory for $104,000, and sells the put options for $1,120. Required a. Prepare the journal entries to record the above events. b. Calculate the change in intrinsic value and the change in time value of the options during the time the company holds the options. c. Does the change in option value allow the company to maintain the $5,000 gross margin expected at the time the company buys the options? Explain why or why not. ANS: a. Investment in options
200 Cash
200
Investment in options
920 Cost of goods sold
920
$1,120 - $200 = $920 Cost of goods sold
1,000 Inventory
1,000
$105,000 - $104,000 = $1,000 Cash
1,120 Investment in options
Cash, receivables
1,120 104,000
Sales revenue
104,000
Cost of goods sold
99,000 Inventory
99,000
$100,000 - $1,000 = $99,000 b.
Change in intrinsic value = ($105,000 - $104,000) - $0 = +$1,000 Change in time value = $200 – ($1,120 - $1,000) = - $80
c.
Gross margin with the hedge = $104,000 – ($99,000 - $920 + $1,000) = $4,920 The gross margin is $80 less than the expected margin of $5,000 because of the decline in option time value.
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-45
17.
Topic: Fair value hedge of investments: put options LO 2 A company holds $1,000,000 par value of debt investments, classified as available-for-sale. The investments were purchased at par on October 2, 2023. They are currently reported at cost and have a market value of $992,000 on December 1, 2023. To protect against further declines in value, on December 1, 2023, the company purchased, for $4,600, 3-month put options at an exercise price of $996,000. The puts qualify as a fair value hedge of the debt investment. The company designates the intrinsic value of the puts as the hedge instrument and reports all income effects of the investment and its hedge in nonoperating gains (losses). On December 31, 2023, the company’s year-end, the investments are selling for $991,000, and the options are selling for $5,200. On March 1, 2024 the company sells the investments for their current value of $989,000 and sells the put options for their intrinsic value of $7,000. Required a. Prepare a schedule of the intrinsic value and time value of the options on December 1, 2023, December 31, 2023, and March 1, 2024. b. Prepare the journal entries to record the events above, including December 31, 2023 year-end adjustments. The company reports option time value changes in income as incurred. ANS: a. December 1, 2023 December 31, 2023 March 1, 2024
Intrinsic value $4,000 5,000 7,000
b. December 1, 2023 Loss on AFS investments (OCI) Investment in AFS debt securities $8,000 = $1,000,000 - $992,000. Investment in options Cash December 31, 2023 Investment in options Nonoperating gains (income) $600 = $5,200 - $4,600. Nonoperating losses (income) Investment in AFS debt securities $1,000 = $992,000 - $991,000. March 1, 2024 Investment in options Nonoperating gains (income) $1,800 = $7,000 - $5,200. ©Cambridge Business Publishers, 2023 9-46
Time value $600 200 0
Total $4,600 5,200 7,000
8,000 8,000
4,600 4,600
600 600
1,000 1,000
1,800 1,800
Advanced Accounting, 5th Edition
Nonoperating losses (income) Investment in AFS debt securities $2,000 = $991,000 - $989,000.
2,000 2,000
Cash
7,000 Investment in options
7,000
Cash Nonoperating losses (income) Investment in AFS debt securities Reclassification of loss on AFS investments (OCI) 18.
989,000 8,000 989,000 8,000
Topic: Fair value hedge of investments with alternative reporting of time value: put options LO 2 A company holds $1,000,000 par value of debt investments, classified as available-for-sale. The investments were purchased at par on October 2, 2023. They are currently reported at cost and have a market value of $992,000 on December 1, 2023. To protect against further declines in value, on December 1, 2023, the company purchased, for $4,600, 3-month put options at an exercise price of $996,000. The puts qualify as a fair value hedge of the debt investment. The company designates the intrinsic value of the puts as the hedge instrument and reports all income effects of the investment and its hedge in nonoperating gains (losses). On December 31, 2023, the company’s year-end, the investments are selling for $991,000, and the options are selling for $5,200. On March 1, 2024 the company sells the investments for their current value of $989,000 and sells the put options for their intrinsic value of $7,000. Required a. Prepare a schedule of the intrinsic value and time value of the options on December 1, 2023, December 31, 2023, and March 1, 2024. b. Prepare the journal entries to record the events above, including December 31, 2023 year-end adjustments. The company reports option time value changes in other comprehensive income, and amortizes option time value to income on a straight-line basis. ANS: a. December 1, 2023 December 31, 2023 March 1, 2024
Intrinsic value $4,000 5,000 7,000
b. December 1, 2023 Loss on AFS investments (OCI) Investment in AFS debt securities $8,000 = $1,000,000 - $992,000. Investment in options Cash
Test Bank, Chapter 9
Time value $600 200 0
Total $4,600 5,200 7,000
8,000 8,000
4,600 4,600
©Cambridge Business Publishers, 2023 9-47
December 31, 2023 Investment in options Loss on options (OCI) Nonoperating gains (income) $600 = $5,200 - $4,600; $400 = $600 - $200. Nonoperating losses (income) Investment in AFS debt securities $1,000 = $992,000 - $991,000. Nonoperating losses (income) Reclassification of loss on options (OCI) $200 = $600/3. March 1, 2024 Investment in options Loss on options (OCI) Nonoperating gains (income) $1,800 = $7,000 - $5,200; $200 = $200 - $0.
600 400 1,000
1,000 1,000
200 200
1,800 200 2,000
Nonoperating losses (income) Investment in AFS debt securities $2,000 = $991,000 - $989,000.
2,000
Nonoperating losses (income) Reclassification of loss on options (OCI) $400 = ($600/3) x 2
400
Cash
2,000
400
7,000 Investment in options
Cash Nonoperating losses (income) Investment in AFS debt securities Reclassification of loss on AFS investments (OCI)
©Cambridge Business Publishers, 2023 9-48
7,000 989,000 8,000 989,000 8,000
Advanced Accounting, 5th Edition
19.
Topic: Hedge of equity securities: put options LO 2 A company purchases equity securities with no significant influence on December 1, 2023 for $1,000,000. To protect their value, on December 1, 2023, the company pays $10,000 for put options on the securities with a $1,000,000 strike price, expiring on March 1, 2024, and designates their intrinsic value as the hedge instrument. The company closes its books on December 31. On March 1, 2024, the company sells the options. All income effects of the securities and the put options are reported in the financial gains (losses) account. Relevant market prices for the securities and the put options are as follows:
Securities Put options
December 1, 2023 $1,000,000 $ 10,000
December 31, 2023 $980,000 $ 22,000
March 1, 2024 $975,000 $ 25,000
Required a. Do the put options qualify for hedge accounting? Explain. b. Prepare the appropriate entries on December 1 to record purchase of the securities and options and on December 31 to adjust the accounts. c. Make the appropriate entries on March 1 to adjust the accounts and record the sale of the put options. ANS: a.
b.
Hedge accounting is not appropriate in this case. Normal accounting matches gains and losses in the same accounting period since both the equity securities and the options are marked to market through income. December 1, 2023 Investment in securities Investment in options
1,000,000 10,000 Cash
1,010,000
December 31, 2023 Financial losses (income)
20,000 Investment in securities
Investment in options
20,000 12,000
Financial gains (income) c.
March 1, 2024 Cash
12,000
25,000 Investment in options Financial gains (income)
Financial losses (income)
22,000 3,000 5,000
Investment in securities
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-49
5,000
20.
Topic: Fair value hedge of AFS debt securities with alternative treatment of time value: put options LO 2 A company holds an investment in debt securities, classified as AFS. The investment balance is $500,000 on December 1, 2023, and its market value is $490,000. On December 1, the company pays $4,500 for 3-month put options on the securities with a strike price of $490,000. The options qualify as a fair value hedge of the securities. All income effects of the securities and the put options are reported in the other gains (losses) account. Changes in option time value are reported in other comprehensive income, and time value is straight-line amortized to income. The company sells the options for $5,000 on March 1, 2024. Relevant market prices for the securities and the put options are as follows:
Securities Put options
December 1, 2023 $490,000 $ 4,500
December 31, 2023 $492,000 $ 3,200
March 1, 2024 $485,000 $ 5,000
Required a. Prepare a schedule of the intrinsic value and time value of the options on December 1, 2023, December 31, 2023, and March 1, 2024. b. Prepare the appropriate entries on December 31 to adjust the accounts. c. Prepare the appropriate entries on March 1 to adjust the accounts and record the sale of the put options. ANS: a. December 1, 2023 December 31, 2023 March 1, 2024
b.
Intrinsic value $ 0 0 5,000
Time value $4,500 3,200 0
Total $4,500 3,200 5,000
December 31, 2023 adjustments Loss on AFS securities (OCI)
10,000
Investment in securities $500,000 - $490,000 = $10,000 loss during unhedged period.
20,000
Investment in AFS securities
2,000 Other gains (income) 2,000 $492,000 - $490,000 = $2,000 gain during hedging period. There is no offsetting loss on the options because there is no change in intrinsic value. Loss on fair value hedge (OCI)
1,300 Investment in options
1,300
$4,500 - $3,200 = $1,300. Other losses (income)
1,500 Reclassification of time value (OCI)
$4,500/3 = $1,500. ©Cambridge Business Publishers, 2023 9-50
Advanced Accounting, 5th Edition
1,500
c.
March 1, 2024 Other losses (income)
7,000 Investment in securities
7,000
$492,000 - $485,000 = $7,000 Investment in options Loss on fair value hedge (OCI)
1,800 3,200
Other gains (income) $5,000 - $3,200 = $1,800; $5,000 - $0 = $5,000. Other losses (income)
5,000
3,000 Reclassification of time value (OCI)
3,000
($4,500/3) x 2 = $3,000 21.
Topic: Fair value hedge of firm purchase commitment: call options LO 2 On August 1, a U.S. company with a December 31 year-end issued a purchase order to a Danish company for kr1,000,000 in merchandise, to be delivered in 4 months. The company will pay the supplier in Danish krone. On August 1, the spot rate was $0.165/kr and the 4-month forward rate was $0.168/kr. To hedge against increases in the U.S. dollar cost of the merchandise, the company invests in call options on kr1,000,000 at a strike price of $0.165/kr, costing $0.005/kr. The options qualify as a fair value hedge of the purchase commitment. On December 1, the spot rate is $0.175/kr. The company takes delivery of the merchandise, sells the options at their intrinsic value of $0.010/kr, and pays the Danish supplier by buying kr1,000,000 in the spot market. All income effects of the above events are reported in cost of goods sold. Required Prepare entries to record the above events. ANS: August 1 Investment in options Cash $5,000 = $0.005 x kr1,000,000. December 1 Investment in options Cost of goods sold $5,000 = ($0.010 - $0.005) x kr1,000,000 Cash Investment in options $10,000 = $0.010 x kr1,000,000.
Test Bank, Chapter 9
5,000 5,000
5,000 5,000
10,000 10,000
©Cambridge Business Publishers, 2023 9-51
Cost of goods sold Firm commitment $7,000 = ($0.175 - $0.168) x kr1,000,000. Inventory Firm commitment Cash $175,000 = $0.175 x kr1,000,000 22.
7,000 7,000
168,000 7,000 175,000
Topic: Fair value hedge of foreign currency firm commitment and exposed position: call options LO 2 A U.S. company issues a purchase order for £1,000,000 in merchandise, to be delivered in 60 days and paid for in 90 days. The current spot rate is $1.32/£ and the 90-day forward rate is $1.33/£. The company purchases 90-day call options on £1,000,000 with a strike price of $1.32/£, paying $0.02/£ for the call options. The options qualify as a fair value hedge of the firm commitment to buy currency. After 60 days, the spot rate is $1.34, the 30-day forward rate is $1.342, and the calls are worth $0.033. The company takes delivery of the merchandise on credit. Thirty days later, the spot rate is $1.36, and the calls are worth their intrinsic value of $0.04. The company uses the options to pay for the merchandise. All income effects of these transactions are reported in cost of goods sold. There is no intervening year-end. Required Prepare the journal entries to record the above events. ANS: Investment in options
20,000
Cash To record purchase of options; $20,000 = $0.02 x £1,000,000.
20,000
Investment in options
13,000 Cost of goods sold To record increase in options value; $13,000 = ($0.033 - $0.02) x £1,000,000. 12,000 Firm commitment To record loss on firm commitment; $12,000 = ($1.342 - $1.33) x £1,000,000.
13,000
Cost of goods sold
Inventory Firm commitment
12,000
1,328,000 12,000 Accounts payable
1,340,000
To record delivery of merchandise. Investment in options
7,000 Cost of goods sold To record increase in options value; $7,000 = ($0.04 - $0.033) x £1,000,000.
©Cambridge Business Publishers, 2023 9-52
7,000
Advanced Accounting, 5th Edition
Cost of goods sold
20,000
Accounts payable To record loss on accounts payable; $20,000 = ($1.36 - $1.34) x £1,000,000. Foreign currency
20,000
1,360,000 Cash Investment in options
1,320,000 40,000
To record exercise of options. Accounts payable
1,360,000 Foreign currency
1,360,000
To record payment to supplier. 23.
Topic: Cash flow hedge of forecasted purchase: call options LO 2 On November 1, 2023, a company forecasts that it will purchase 1,000,000 bushels of oats in 4 months for use in the manufacture of its cereal products. To hedge against rising costs, the company buys 1,000,000 call options for oats, expiring March 1, 2024, with a strike price of $2.75/bushel. The options cost $0.10/bushel, and the spot price on November 1 is $2.72/bushel. Management designates the intrinsic value of the options as the hedge, and the options qualify as a cash flow hedge of the forecasted purchase. All income effects of the inventory and the hedge are reported in cost of goods sold. On December 31, 2023, the company’s year-end, the spot price for oats is $2.77/bushel and the options are selling for $0.13/bushel. On March 1, 2024, the spot price for oats is $2.80/bushel and the company sells the options for their intrinsic value of $0.05/bushel. On March 3, 2024, the company purchases 1,000,000 bushels of oats at the spot price of $2.81/bushel. It sells products containing the oats on June 5, 2024. The company reports the change in option time value directly in income. Required a. Prepare a schedule of the intrinsic value and time value of the options on November 1, 2023, December 31, 2023, and March 1, 2024. b. Prepare entries to record the above events, including the December 31, 2023 adjusting entry. ANS: a. November 1, 2023 December 31, 2023 March 1, 2024
Test Bank, Chapter 9
Intrinsic value $ 0 20,000 50,000
Time value $100,000 110,000 0
Total $100,000 130,000 50,000
©Cambridge Business Publishers, 2023 9-53
b. November 1, 2023 Investment in options Cash To record investment in call options; $100,000 = $0.10 x 1,000,000. December 31, 2023 Investment in options Cost of goods sold (gain in time value) Gain on cash flow hedge (gain in intrinsic value) (OCI) Increase in intrinsic value = $20,000 - $0 = $20,000 Increase in time value = $110,000 - $100,000 = $10,000 March 1, 2024 Cost of goods sold (loss in time value) Investment in options Gain on cash flow hedge (gain in intrinsic value) (OCI) Increase in intrinsic value = $50,000 - $20,000 = $30,000 Decrease in time value = $110,000 - $0 = $110,000 Cash
100,000 100,000
30,000 10,000 20,000
110,000 80,000 30,000
50,000
Investment in options To record the sale of the options.
50,000
March 3, 2024 Inventory 2,810,000 Cash To record purchase of oats in the spot market; $2,810,000 = $2.81 x 1,000,000. June 5, 2021 Cost of goods sold Reclassification of gain on cash flow hedge (intrinsic value) (OCI) Inventory To record cost of oats included in products sold.
©Cambridge Business Publishers, 2023 9-54
2,810,000
2,760,000 50,000 2,810,000
Advanced Accounting, 5th Edition
24.
Topic: Cash flow hedge of forecasted purchase with alternative reporting for time value: call options LO 2 On November 1, 2023, a company forecasts that it will purchase 1,000,000 bushels of oats in 4 months for use in the manufacture of its cereal products. To hedge against rising costs, the company buys 1,000,000 call options for oats, expiring March 1, 2024, with a strike price of $2.75/bushel. The options cost $0.10/bushel, and the spot price on November 1 is $2.72/bushel. Management designates the intrinsic value of the options as the hedge, and the options qualify as a cash flow hedge of the forecasted purchase. All income effects of the inventory and the hedge are reported in cost of goods sold. On December 31, 2023, the company’s year-end, the spot price for oats is $2.77/bushel and the options are selling for $0.13/bushel. On March 1, 2024, the spot price for oats is $2.80/bushel and the company sells the options for their intrinsic value of $0.05/bushel. On March 3, 2024, the company purchases 1,000,000 bushels of oats at the spot price of $2.81/bushel. It sells products containing the oats on June 5, 2024. The company reports the change in option time value in other comprehensive income and straight-line amortizes option time value to income. Required a. Prepare a schedule of the intrinsic value and time value of the options on November 1, 2023, December 31, 2023, and March 1, 2024. b. Prepare entries to record the above events, including the December 31, 2023 adjusting entry. ANS: a. November 1, 2023 December 31, 2023 March 1, 2024
Intrinsic value $ 0 20,000 50,000
Time value $100,000 110,000 0
Total $100,000 130,000 50,000
b. November 1, 2023 Investment in options Cash To record investment in call options; $100,000 = $0.10 x 1,000,000. December 31, 2023 Investment in options Gain on cash flow hedge (time value) (OCI) Gain on cash flow hedge (intrinsic value) (OCI) Increase in intrinsic value = $20,000 - $0 = $20,000 Increase in time value = $110,000 - $100,000 = $10,000
100,000
30,000 10,000 20,000
Cost of goods sold Reclassification of loss on cash flow hedge (time value) (OCI) To amortize option time value; $50,000 = ($100,000/4) x 2.
Test Bank, Chapter 9
100,000
50,000 50,000
©Cambridge Business Publishers, 2023 9-55
March 1, 2024 Loss on cash flow hedge (time value) (OCI) Investment in options Gain on cash flow hedge (intrinsic value) (OCI) Increase in intrinsic value = $50,000 - $20,000 = $30,000 Decrease in time value = $110,000 - $0 = $110,000 Cost of goods sold Reclassification of loss on cash flow hedge (time value) (OCI) To amortize option time value; $50,000 = ($100,000/4) x 2. Cash
110,000 80,000 30,000
50,000 50,000
50,000
Investment in options To record the sale of the options.
50,000
March 3, 2024 Inventory 2,810,000 Cash To record purchase of oats in the spot market; $2,810,000 = $2.81 x 1,000,000. June 5, 2021 Cost of goods sold Reclassification of gain on cash flow hedge (intrinsic value) (OCI) Inventory To record cost of oats included in products sold. 25.
2,810,000
2,760,000 50,000 2,810,000
Topic: Cash flow hedge of forecasted purchase: call options LO 2 A U.S. company expects to purchase €1,000,000 in merchandise from an Italian supplier in 4 months. To protect against a weakening U.S. dollar, on June 1 the company pays $11,000 for September call options on €1,000,000, with a strike price of $1.13/€. The current spot rate is $1.12/€. The intrinsic value of the options is designated as a cash flow hedge of the forecasted purchase, and changes in time value are reported in income. Income effects of the purchase and the hedge are reported in the company’s cost of goods sold. On September 30, the company takes delivery of the merchandise, sells the options for their intrinsic value, and pays the supplier by buying €1,000,000 on the spot market. The September 30 spot rate is $1.16/€. On October 25, the company sells the merchandise and records cost of goods sold. The company’s accounting year ends December 31. Required Prepare the journal entries for the above transactions, including recognition of cost of goods sold on the sale of the merchandise.
©Cambridge Business Publishers, 2023 9-56
Advanced Accounting, 5th Edition
ANS: June 1 Investment in options
11,000 Cash
11,000
September 30 Investment in options Cost of goods sold
19,000 11,000
Gain on cash flow hedge (OCI) Intrinsic value =($1.16 - $1.13) x €1,000,000 = $30,000. $19,000 = $30,000 - $11,000. Cash
30,000
30,000 Investment in options
Inventory
30,000 1,160,000
Cash October 25 Cost of goods sold Reclassification of gain on cash flow hedge (OCI)
1,160,000
1,130,000 30,000 Inventory
26.
1,160,000
Topic: Cash flow hedge of forecasted sale: put options LO 2 A U.S. company expects to sell €1,000,000 in merchandise to an Italian customer in 4 months. To protect against a strengthening U.S. dollar, on June 1 the company pays $15,000 for put options on €1,000,000 expiring October 1, with a strike price of $1.13/€. The current spot rate is $1.12/€. The intrinsic value of the options is designated as a cash flow hedge of the forecasted sale, and changes in time value are reported in income. Income effects of the sale and the hedge are reported in the company’s sales revenue. On June 30, the company’s year-end, the spot rate is $1.10/€ and the options are worth $33,000. On October 1, the company delivers the merchandise, receives payment in euros, and uses the options to convert euros to U.S. dollars. The October 1 spot rate is $1.09/€, and the options are worth their intrinsic value. Required Prepare the journal entries for the above transactions, including June 30 adjusting entries. ANS:
June 1 Investment in options
15,000 Cash
June 30 Investment in options Sales revenue
15,000
18,000 2,000
Gain on cash flow hedge (OCI) Change in intrinsic value =[($1.13 - $1.10) – ($1.13 - $1.12)] x €1,000,000 = $20,000. $18,000 = $33,000 - $15,000. Test Bank, Chapter 9
20,000
©Cambridge Business Publishers, 2023 9-57
October 1 Investment in options Sales revenue
7,000 3,000
Gain on cash flow hedge (OCI) Change in intrinsic value =[($1.13 - $1.09) – ($1.13 - $1.10)] x €1,000,000 = $10,000. $7,000 = $40,000 - $33,000. Cash Reclassification of gain on cash flow hedge (OCI)
1,130,000 30,000 Investment in options Sales revenue
27.
10,000
40,000 1,120,000
Topic: Cash flow hedge: interest rate cap LO 2 On July 1, 2023, a company borrowed $1 million for one year, with interest paid semi-annually at SOFR. The rate is adjusted every six months. On July 1, 2023, SOFR was 2.5% per annum. To hedge against a possible rise in interest rates for the second six-month period of the loan, on July 1 the company bought a one-year 2.5% interest rate cap for $1,100, payable immediately. If SOFR goes above 2.5%, the company will be reimbursed for the difference between SOFR and 2.5%. The cap is a cash flow hedge of the future variable interest cost and is an option since it offers one-way protection against a rise in interest rates. The intrinsic value of the cap is designated as the hedge instrument and the hedge is fully effective. On December 31, SOFR rose to 2.7% and the cap is worth $1,000. The company closes its books on December 31 and June 30. Required Prepare the entries necessary to record the above events on July 1, 2023, December 31, 2023, and June 30, 2024. Changes in the time value of the cap are reported directly in income. ANS: July 1, 2023 Cash
1,000,000 Loan payable
1,000,000
Investment in cap
1,100 Cash
1,100
December 31, 2023 Interest expense
12,500 Cash
12,500
$12,500 = 2.5%/2 x $1,000,000. Interest expense (TV)
1,100
Investment in cap Gain on cash flow hedge (IV) (OCI) Increase in intrinsic value = (2.7% – 2.5%)/2 x $1,000,000 = $1,000. ©Cambridge Business Publishers, 2023 9-58
100 1,000
Advanced Accounting, 5th Edition
June 30, 2024 Interest expense Reclassification of gain on cash flow hedge (IV) (OCI)
12,500 1,000 Cash
13,500
$13,500 = 2.7%/2 x $1,000,000. Cash
1,000 Investment in cap
1,000
Reimbursement of excess interest. 28.
Topic: Cash flow hedge with alternative reporting for time value: interest rate cap LO 2 On July 1, 2023, a company borrowed $1 million for one year, with interest paid semi-annually at SOFR. The rate is adjusted every six months. On July 1, 2023, SOFR was 2.5% per annum. To hedge against a possible rise in interest rates for the second six-month period of the loan, on July 1 the company bought a one-year 2.5% interest rate cap for $1,100, payable immediately. If SOFR goes above 2.5%, the company will be reimbursed for the difference between SOFR and 2.5%. The cap is a cash flow hedge of the future variable interest cost and is an option since it offers one-way protection against a rise in interest rates. The intrinsic value of the cap is designated as the hedge instrument and the hedge is fully effective. On December 31, SOFR rose to 2.7% and the cap is worth $1,000. The company closes its books on December 31 and June 30. Required Prepare the entries necessary to record the above events on July 1, 2023, December 31, 2023, and June 30, 2024. Changes in cap time value are reported in other comprehensive income, and time value is straight-line amortized to income. ANS: July 1, 2023 Cash
1,000,000 Loan payable
1,000,000
Investment in cap
1,100 Cash
1,100
December 31, 2023 Interest expense
12,500 Cash
12,500
$12,500 = 2.5%/2 x $1,000,000. Loss on cash flow hedge (TV)(OCI)
1,100
Investment in cap Gain on cash flow hedge (IV) (OCI) Increase in intrinsic value = (2.7% – 2.5%)/2 x $1,000,000 = $1,000.
Test Bank, Chapter 9
100 1,000
©Cambridge Business Publishers, 2023 9-59
Interest expense
550 Reclassification of loss on cash flow hedge (TV)(OCI)
550
$550 = $1,100/2. June 30, 2024 Interest expense Reclassification of gain on cash flow hedge (IV) (OCI)
12,500 1,000 Cash
13,500
$13,500 = 2.7%/2 x $1,000,000. Interest expense
550 Reclassification of loss on cash flow hedge (TV)(OCI)
550
$550 = $1,100/2. Cash
1,000 Investment in cap
1,000
Reimbursement of excess interest. 29.
Topic: Fair value hedge: interest rate swap LO 3 On January 1, a company has a loan of $1,000,000 on which it pays a 2% fixed rate annually on December 31. On January 1, the company enters an interest rate swap whereby it receives the 2% fixed rate and pays the prime rate plus 0.9%. At the inception of the swap, the prime rate is 1.3%. The swap qualifies as a fair value hedge of the fixed payments. The company’s accounting year ends December 31, and all income effects of the loan and the swap are reported in interest expense. Required a. Prepare the journal entry to record the company’s interest expense for the year, and the net cash payment from the swap. b. On December 31, the prime rate has increased, and the change in the value of the swap and the debt is each $4,000. Prepare the journal entry or entries to record this information. ANS: a. Interest expense
20,000
Cash 2% x $1,000,000 = $20,000 fixed interest paid on the loan. Interest expense
20,000
2,000
Cash 2,000 [(1.3% + 0.9%) – 2%] x $1,000,000 = $2,000 additional interest paid to the swap writer at the variable rate. ©Cambridge Business Publishers, 2023 9-60
Advanced Accounting, 5th Edition
b. Interest expense
4,000
Investment in swap The swap loses value since the company now has higher variable payments. Loan payable
4,000
Interest expense The loan gains value since its present value is lower due to higher rates. 30.
4,000
4,000
Topic: Fair value hedge: interest rate swap LO 3 On January 1, a company has a loan of $1,000,000 on which it pays a 3% fixed rate annually on December 31. On January 1, the company enters an interest rate swap whereby it receives the 3% fixed rate and pays the prime rate plus 1.0%. At the inception of the swap, the prime rate is 1.7%. The swap qualifies as a fair value hedge of the fixed payments. The company’s accounting year ends December 31, and all income effects of the loan and the swap are reported in interest expense. Required a. Prepare the journal entry to record the company’s interest expense for the year and the net cash payment from the swap. b. On December 31, the prime rate has declined, and the change in the value of the swap and the debt is each $8,000. Prepare the journal entry or entries to record this information. ANS: a. Interest expense
30,000
Cash 3% x $1,000,000 = $30,000 fixed interest paid on the loan Cash
b.
30,000
3,000
Interest expense [(1.7% + 1.0%) – 3%] x $1,000,000 = $3,000 received from the swap writer. Investment in swap
3,000
8,000
Interest expense 8,000 The swap gains value since the company now has lower variable payments and the net expected inflow is higher. Interest expense
8,000
Loan payable 8,000 The loan has a higher liability value since its present value is higher due to lower interest rates.
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-61
31.
Topic: Cash flow hedge: interest rate swap LO 3 On January 1, a company borrowed $1 million of variable rate debt at an annual rate equal to the Treasury bill rate plus 0.5%, interest paid semiannually on June 30 and December 31 of each year. The variable rate is reset every six months. To hedge against increasing interest rates, on January 1 the company entered a receive variable/pay fixed interest rate swap, agreeing to pay a 2.4% fixed rate on a notional amount of $1 million. The swap qualifies as a cash flow hedge of the variable payments. The present value of the expected future net swap payments was $5,800. The treasury bill rate was 1.5% on January 1. On June 30, the treasury bill rate is 1.6% and the swap has a fair value of $2,200. On December 31, the treasury bill rate is 1.7% and the swap has a present value of $400. Required Prepare the journal entries to record the events for the year. The company has a December 31 year-end, and income effects of the debt and the swap are reported in interest expense. ANS: January 1 Cash
1,000,000
Loan payable To record the variable rate loan.
1,000,000
Loss on cash flow hedge (OCI) 5,800 Investment in swap 5,800 To record the swap agreement at its fair value. The swap is a liability because the company expects to pay a net amount of $2,000 [= (.024 - .02)/2 x $1,000,000] each period on the swap. June 30 Interest expense 10,000 Cash To record the variable interest payment on the loan; $10,000 = $1,000,000 x 0.02/2.
10,000
Investment in swap 2,000 Cash To record the net cash outflow on the swap; $2,000 = (0.024 – 0.02)/2 x $1,000,000.
2,000
Interest expense Reclassification of loss on cash flow hedge (OCI) To adjust interest expense to the actual rate paid.
2,000
2,000
Investment in swap 1,600 Gain on cash flow hedge (OCI) To revalue the swap to its new present value; $(1,600) = $2,200 – ($5,800 - $2,000). December 31 Interest expense 10,500 Cash To record the interest payment on the loan; $10,500 = $1,000,000 x 0.021/2.
©Cambridge Business Publishers, 2023 9-62
1,600
10,500
Advanced Accounting, 5th Edition
Investment in swap 1,500 Cash To record the net cash outflow on the swap; $1,500 = (0.024 – 0.021)/2 x $1,000,000.
1,500
Interest expense Reclassification of loss on cash flow hedge (OCI) To adjust interest expense to the actual rate paid.
1,500
1,500
Investment in swap 300 Gain on cash flow hedge (OCI) To revalue the swap to its new present value; $(300) = $400 – ($2,200 - $1,500). 32.
300
Topic: Cash flow hedge: Interest rate swap LO 3 A company has a $1,000,000 loan with a variable interest rate, due December 31, 2024. The interest rate is set at the beginning of each year and interest is paid at year-end. On January 1, 2023, when the variable rate is 2.5%, the company enters a 2-year swap agreement whereby it pays a fixed rate of 2.8% and receives the variable rate required to pay interest on the loan. The swap qualifies as a cash flow hedge of the variable payments. On December 31, 2023, the variable rate is reset to 2.6%. The company has a December 31 year-end and all income effects of the loan and the swap are reported in interest expense. Required Prepare journal entries to record the swap liability at January 1, 2023, and all entries required at December 31, 2023 and 2024. The company records the swap liability at the present value of future expected net payments, discounted at the variable rate. ANS: The swap requires the company to make a net payment of $3,000 at the end of 2023 (= $0.028 – 0.025) x $1,000,000. If we assume the 2024 payment will also be $3,000, the present value of the swap obligation, discounted at the variable rate of 2.5%, is ($3,000/1.025) + ($3,000/1.0252) = $5,782. January 1, 2023 Loss on cash flow hedge (OCI) Investment in swap To record the swap liability
5,782 5,782
December 31, 2023 Interest expense 25,000 Cash To record the variable interest payment; $25,000 = 0.025 x $1,000,000. Investment in swap Cash To record the payment on the swap.
Test Bank, Chapter 9
25,000
3,000 3,000
©Cambridge Business Publishers, 2023 9-63
Interest expense Reclassification of loss on cash flow hedge (OCI) To adjust interest expense to the actual fixed rate of 2.8%.
3,000 3,000
The variable rate is reset to 2.6%, so the remaining swap payment as of the end of 2023 is $2,000 (= .028 - .026) x $1,000,000, and the new present value of the swap obligation is $2,000/1.026 = $1,949. The current balance for the swap obligation is $2,782 (= $5,782 $3,000). Therefore, the swap obligation is reduced by $833 (= $1,949 - $2,782). Investment in swap Gain on cash flow hedge (OCI) To adjust the swap obligation to its current present value.
833 833
December 31, 2024 Interest expense 26,000 Cash To record the variable interest payment; $26,000 = 0.026 x $1,000,000. Investment in swap Cash To record the payment on the swap.
2,000
Interest expense Reclassification of loss on cash flow hedge (OCI) To adjust interest expense to the actual fixed rate of 2.8%.
2,000
26,000
2,000
2,000
The swap liability is now zero. Its current balance is a debit of $51 (= $1,949 - $2,000). Since the swap is completed, the remaining amount in accumulated other comprehensive income, which is a credit of $51, is also closed out. Reclassification of gain on cash flow hedge (OCI) Investment in swap To close the swap obligation and the remaining balance in AOCI. 33.
51 51
Topic: Cash flow hedge: interest rate swap LO 3 On January 1, a company issued $5,000,000 in variable rate debt at the prime rate plus 0.6% with interest payments due every six months. The variable rate is adjusted every six months. The prime rate is 1.7% on January 1, so the variable debt has an interest rate of 2.3% for the first six months. On January 1, the company enters into an interest rate swap in which it receives the variable rate and pays a fixed rate of 2.8% on the notional amount of $5,000,000 for the life of the debt. On June 30, the prime rate is 1.2% and the market value of the swap declines by $5,000. Required a. How much in interest expense will the company record for the first six months of the year, after considering the effects of the swap? b. Is the swap a cash flow hedge or a fair value hedge? Explain. c. Where is the change in value of the swap reported?
©Cambridge Business Publishers, 2023 9-64
Advanced Accounting, 5th Edition
ANS: a. b. c. 34.
Interest expense is recorded at 2.8% (2.3% variable rate, plus extra cash payment of (2.8% - 2.3%) on the swap): $5,000,000 x 2.8% x 1/2 = $70,000 Cash flow hedge: This is a receive variable/pay fixed swap. It hedges the variability in the unknown future variable interest payments, so it is a hedge of a forecasted transaction. Swap value changes go to other comprehensive income, to be reclassified as an increase in the lower variable rate interest expense over the next six months.
Topic: Cash flow hedge: interest rate swap LO 3 A company has a loan of $1,000,000 on which it pays the treasury bill rate plus 0.9% annually on December 31. On January 1, the treasury bill rate is 1.4%, and the company enters an interest rate swap whereby it receives the treasury bill rate plus 0.9% and pays a fixed rate of 2%. The swap qualifies for hedge accounting, the company has a December 31 year-end, and all income effects of the loan and the swap are reported in interest expense. The company values the swap at the expected future net swap cash flows, discounted at the variable rate. Required a. Is the swap initially recognized as an asset or liability? Explain. b. Prepare the journal entries to record the company’s interest expense for the year. c. On December 31, the treasury bill rate has fallen to 0.8%. Is the swap now reported as an asset or liability? Explain. What account reports the gain or loss on the swap, to revalue it to its new market value? ANS: a.
The swap initially involves a net cash inflow of (2.3% - 2%) x 1,000,000 = $3,000/year. Therefore, it is recognized initially as an asset, at the present value of the future receipts.
b. Interest expense
23,000
Cash 2.3% x $1,000,000 = $23,000 variable interest paid on the loan Cash
23,000
3,000
Investment in swap Reimbursement from the swap writer at the fixed rate. Reclassification of gain on cash flow hedge (OCI)
3,000
3,000
Interest expense To adjust interest expense to the actual rate paid. c.
The swap now involves a net cash outflow of (2% - 1.7%) x $1,000,000 = $3,000/year. Therefore, the present value of the future payments is a liability. The adjustment in swap value is reported as a reduction of OCI.
Test Bank, Chapter 9
©Cambridge Business Publishers, 2023 9-65
3,000
TEST BANK CHAPTER 10 State and Local Governments: Introduction and General Fund Reporting MULTIPLE CHOICE 1.
2.
3.
4.
Topic: Nature of government activities LO 1 Major attributes of a government include all of the following except: a. b. c. d.
A government must adhere to a legal budget. Use of certain financial inflows is restricted by external organizations. Matching of revenues to the costs of providing services is a key reporting concept. Governments do not have equity owners.
ANS:
c
Topic: Nature of government activities LO 1 Which group is least likely to be a user of a county’s financial statements? a. b. c. d.
Stockholders Government officials Citizens Credit market representatives
ANS:
a
Topic: Nature of government activities LO 1 County activities involving economic assistance, health and safety, education, and legislative services are categorized in its financial statements as: a. b. c. d.
Governmental activities Support activities Fiduciary activities Proprietary activities
ANS:
a
Topic: Nature of government activities LO 1 Activities where a county holds resources in a trust or custodial capacity for entities or individuals outside the county are categorized in its financial statements as: a. b. c. d.
Governmental activities External activities Fiduciary activities Proprietary activities
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-1
ANS: 5.
6.
7.
8.
c
Topic: Nature of government activities LO 1 County activities involving provision of services in return for user fees are categorized in its financial statements as: a. b. c. d.
Governmental activities Public activities Fiduciary activities Proprietary activities
ANS:
d
Topic: Users of government financial statements LO 1 Organizations that rate a government’s bond issues are least interested in a. b. c. d.
The government’s future financing plans. The impact of the government’s current performance on future tax rates. Material departures from GAAP in the government’s financial statements. Whether the government’s financial statements are audited on a timely basis.
ANS:
b
Topic: Users of government financial statements LO 1 Elected officials and citizens of a town are least interested in a. b. c. d.
The town’s future financing plans. The impact of the town’s current performance on future tax rates. Material departures from GAAP in the town’s financial statements. Costs of services provided.
ANS:
c
Topic: Sources of Government GAAP LO 1 The GASB provides financial reporting standards for all of the following except a. b. c. d.
public universities. federal government units. villages. state governments.
ANS:
b
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
9.
10.
Topic: GAAP hierarchy LO 1 Category A in the GAAP hierarchy in state and local government accounting consists of a. b. c. d.
GASB Statements GASB Statements and AICPA Industry Audit and Accounting Guides AICPA Industry Audit and Accounting Guides GASB Implementation Guides
ANS:
a
Topic: GAAP hierarchy LO 1 Which statement below best describes the GAAP hierarchy in state and local government accounting? a. b. c. d. ANS:
11.
12.
Only GASB Statements are considered authoritative. GASB Statements and AICPA Industry Audit and Accounting Guides are considered authoritative. Only AICPA Industry Audit and Accounting Guides are considered authoritative. GASB Statements, GASB Technical Bulletins, Implementation Guides, and GASBapproved AICPA literature are considered authoritative. d
Topic: GAAP hierarchy LO 1 The GAAP hierarchy in state and local government accounting identifies sources of authoritative guidance for: a. b. c. d.
Preparation of a legal budget Preparation of financial statements Providing information required by creditors of the governmental unit Providing information required by supervisory levels of government
ANS:
b
Topic: Objectives of financial reporting LO 1 The concept of interperiod equity for a government means that a. b. c. d.
future taxpayers will not be required to pay principal and interest on bonds issued today. deficit budgets must be approved by current taxpayers. government actions today will not reduce future services. current services will not be paid for by future taxpayers.
ANS:
d
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-3
13.
14.
15.
16.
Topic: Reporting entity LO 1 The primary government in the financial reporting entity has all of the following features except a. b. c. d.
its governing body is separately elected. it is fiscally independent of other governments. it is funded entirely by taxes and public grants. it is a legally separate entity.
ANS:
c
Topic: Reporting entity LO 1 A government’s financial statements report on the activities of a. b. c. d.
The primary government. The primary government and blended component units. The primary government and discretely presented component units. The primary government and all component units.
ANS:
d
Topic: Component units LO 1 In the financial statements of a county government, a component unit is a government unit: a. b. c. d.
That is geographically located in the county. For which the primary government is financially accountable. That has the same board members as the primary government. That issues its own bonds.
ANS:
b
Topic: Component units LO 1 A blended component unit of a county is most likely to: a. b. c. d.
Adopt its own budget. Exist to provide services to the primary government. Issue bonds for which the component unit is financially obligated. Have a minority of board members that are employed by the primary government.
ANS:
b
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
17.
18.
Topic: Component units LO 1 A discretely presented component unit of a county is most likely to: a. b. c. d.
Require primary government approval for major decisions. Exist to provide services to the primary government. Issue bonds for which the component unit is financially obligated. Have the same governing body as the primary government.
ANS:
c
Topic: Component units LO 1 Which of the following would most likely be reported as a blended component unit of a county government? a.
b. c. d.
ANS: 19.
The sewer district is responsible for sewage treatment services provided to several surrounding local governments, including the county. The county appoints a minority of the sewer district’s board members. The district sets service rates and makes all decisions regarding its operations. Its operations are funded by property tax levies and user charges, and by debt for which it is legally liable. The county library was established by the county and is a separate legal entity receiving an annual budgetary contribution from the county. Library board members are appointed by the county, and bonds and notes for library capital costs are county debt. The county medical center is a separate legal corporation. Its bonds are guaranteed by the county. The building authority is a separate legal entity whose board is appointed by the county. The county is legally liable for bonds issued by the building authority, which are used to finance county construction projects. d
Topic: Component units LO 1 Activities of a county hospital that is organized as a not-for-profit are likely to be reported a. b. c. d.
In its own financial statements, separate from the county’s financial statements. As an NFP organization, following FASB reporting principles. As a discretely presented component unit in the county’s financial statements. As a blended component unit in the county’s financial statements.
ANS:
d
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-5
20.
21.
Topic: Fund structure LO 2 Accumulation of money to be used to pay the principal on general obligation bonds is reported in a: a. b. c. d.
Special revenue fund. Custodial fund. Permanent fund. Debt service fund.
ANS:
d
Topic: Fund structure LO 2 Which statement is true concerning payment of principal and interest on general obligation debt? a. b. c. d.
ANS: 22.
Amounts accumulated for future payment of principal are reported in a permanent fund, while amounts accumulated for future payment of interest are reported in a debt service fund. Amounts accumulated for future payment of principal and interest are reported in a debt service fund. Amounts accumulated for future payment of principal and interest are reported in a custodial fund. Amounts accumulated for future payment of principal are reported in a debt service fund, while amounts accumulated for future payment of interest are reported in the general fund. b
Topic: Fund structure LO 2 Legal trusts are reported: a. b. c. d. ANS:
Only in fiduciary funds. In governmental funds if they benefit the public. In enterprise funds if they benefit the public and in fiduciary funds if they benefit specific people. In fiduciary funds if they benefit the public and in governmental funds if they benefit specific people. b
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
23.
24.
25.
26.
Topic: Fund structure LO 2 Fiduciary funds of a state or local government include all of the following except: a. b. c. d.
Private purpose trust funds. Custodial funds. Investment trust funds. Special revenue funds.
ANS:
d
Topic: Fund structure LO 2 Collections of property taxes are reported in a county’s: a. b. c. d.
Special revenue fund. General fund. Investment trust fund. Custodial fund.
ANS:
b
Topic: Fund structure LO 2 A county is in the process of building a new courthouse. Proceeds of a general obligation bond issue to fund construction are reported in: a. b. c. d.
An enterprise fund. An internal service fund. A debt service fund. A capital projects fund.
ANS:
d
Topic: Fund structure LO 2 A county receives a federal grant to be used for community health programs. This grant is reported in a. b. c. d.
An enterprise fund. A special revenue fund. A permanent fund. A custodial fund.
ANS:
b
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-7
27.
28.
29.
30.
Topic: Accounting and reporting by funds LO 2 A purchase of equipment would be reported as an expenditure in which of the following funds? a. b. c. d.
Special revenue fund Enterprise fund Internal service fund Investment trust fund
ANS:
a
Topic: Accounting and reporting by funds LO 2 A purchase of equipment would be reported as an asset in which of the following funds? a. b. c. d.
Enterprise fund Capital projects fund Special revenue fund Permanent fund
ANS:
a
Topic: Accounting and reporting by funds LO 2 A government always has only one a. b. c. d.
Internal service fund. Capital projects fund. Special revenue fund. General fund.
ANS:
d
Topic: Accounting and reporting by funds LO 2 Which fund reports its operating results in a statement of revenues, expenditures, and changes in fund balances? a. b. c. d.
Investment trust fund Custodial fund Internal service fund Debt service fund
ANS:
d
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
31.
32.
33.
34.
Topic: Accounting and reporting by funds LO 2 Which fund reports its operating results in a statement of revenues, expenses, and changes in net position? a. b. c. d.
General fund Special revenue fund Enterprise fund Debt service fund
ANS:
c
Topic: Accounting and reporting by funds LO 2 The governmental funds balance sheet will never report: a. b. c. d.
Equipment, net Property taxes receivable Supplies Nonspendable fund balance
ANS:
a
Topic: Accounting and reporting by funds LO 2 The governmental funds operating statement reports: a. b. c. d.
Cash. Expenditures for equipment. Depreciation expense. Loans to other funds.
ANS:
b
Topic: Accounting and reporting by funds LO 2 The proprietary funds operating statement reports: a. b. c. d.
Expenditures. Accrued interest revenue. Proceeds from sale of property. Payments of principal on long-term debt.
ANS:
b
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-9
35.
36.
37.
38.
Topic: Accounting and reporting by funds LO 2 The proprietary funds balance sheet reports: a. b. c. d.
Fund balances. Proceeds from sale of property. Interfund transfers. Net position.
ANS:
d
Topic: Accounting and reporting by funds LO 2 The financial statements of governmental funds include: a. b. c. d.
A statement of revenues, expenses, and changes in net position. A statement of cash flows. A statement of changes in net position. A statement of revenues, expenditures, and changes in fund balances.
ANS:
d
Topic: Accounting and reporting by funds LO 2 The financial statements of proprietary funds include: a. b. c. d.
A statement of revenues, expenses, and changes in net position. A budgetary comparison statement. A statement of changes in net position. A statement of revenues, expenditures, and changes in fund balances.
ANS:
a
Topic: Accounting and reporting by funds LO 2 A county’s operating statement for governmental funds will not include a. b. c. d.
Principal payments on long-term debt. Repayment of short-term loans from other funds. Purchases of equipment. Proceeds from the sale of equipment.
ANS:
b
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
39.
40.
41.
42.
Topic: Accounting and reporting by funds LO 2 Which item below is reported in the “other financing sources and uses” section of the operating statement of governmental funds? a. b. c. d.
Amounts paid for the purchase of capital assets. Proceeds from the sale of capital assets. Payment of principal on bonds Payment of interest on bonds
ANS:
b
Topic: Accounting and reporting by funds LO 2 Which one of the following is an expenditure of the current year for a general fund? a. b. c. d.
Short-term investments made in the current year. Purchase in the current year of equipment with an estimated life of 20 years Estimated bad debts for the current year Pension benefits earned by current employees.
ANS:
b
Topic: Accounting for the general fund LO 3 Which one of the following items is reported as a deferred inflow on the general fund’s balance sheet? a. b. c. d.
Short-term loan payable to a proprietary fund. Interest owing on bonds, to be paid in three years. Property taxes collected in advance of the year they are available to spend. Long-term investments.
ANS:
c
Topic: Fund balance classifications LO 3 Resources from state grants required to be spent on specific activities are reported in which fund balance category of a county’s general fund balance sheet? a. b. c. d.
Assigned Committed Restricted Nonspendable
ANS:
c
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-11
43.
44.
45.
46.
Topic: Fund balance classifications LO 3 Resources required by the legal budget to be used for debt service are reported in which fund balance category of a state’s general fund balance sheet? a. b. c. d.
Assigned Committed Restricted Nonspendable
ANS:
b
Topic: Fund balance classifications LO 3 Classifications of fund balance on the general fund balance sheet include all but which one of the classifications below? a. b. c. d.
Nonspendable Committed Assigned Reserved
ANS:
d
Topic: Fund balance classifications LO 3 What is the purpose of the fund balance classification system for the general fund? a. b. c. d.
Report on a full accrual basis. Improve assessment of resource availability. Better measurement of actual costs of providing services. Reduce the tendency to borrow to reduce deficits.
ANS:
b
Topic: Fund balance classifications LO 3 On the balance sheet for the general fund, which fund balance category reports inventories held at year-end? a. b. c. d.
Nonspendable Restricted Committed Assigned
ANS:
a
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
47.
48.
49.
Topic: General fund budget entry LO 3 A general fund’s budgeted expenditures for the year are called: a. b. c. d.
Estimated expenditures Encumbrances Appropriations Fund balance deficits
ANS:
c
Topic: General fund budget entry LO 3 A county general fund has $415 in estimated revenues, $10 in estimated other financing sources, $395 in appropriations, and $25 in estimated other financing uses. The beginning-ofyear budget entry for the general fund will include a credit to a. b. c. d.
Estimated revenues. Fund balance—unassigned. Estimated other financing sources. Cash.
ANS:
b
Topic: General fund budget entry LO 3 A county general fund has $415 in estimated revenues, $10 in estimated other financing sources, $395 in appropriations, and $25 in estimated other financing uses. The beginning-ofyear budget entry for the general fund will include a debit to a. b. c. d.
Appropriations. Fund balance—unassigned. Estimated other financing sources. Fund balance—restricted.
ANS:
c
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-13
50.
Topic: General fund budget entry LO 3 The general fund has the following budget: • • • •
$400,000 in estimated revenues, $410,000 in appropriations, $20,000 in estimated other financing sources, and $25,000 in estimated other financing uses.
If the general fund’s balance in fund balance–unassigned was $60,000 at the beginning of the year, before the budget entry, what is its balance after the budget entry?
51.
52.
a. b. c. d.
$45,000 $75,000 $40,000 $35,000
ANS:
a $60,000 + $400,000 – $410,000 + $20,000 – $25,000 = $45,000
Topic: Property tax revenues LO 3 The general fund collects taxes that are legally restricted for use in a future year. The amount of the collections is reported on the general fund’s: a. b. c. d.
Operating statement as an other financing source. Balance sheet as a liability. Operating statement as revenues. Balance sheet as a deferred inflow.
ANS:
d
Topic: General fund accounting for revenues LO 3 Which one of the following is most likely to be accrued as revenue by the general fund prior to receiving the cash? a. b. c. d.
Fees levied for licenses and permits Property tax revenues Fines from speeding tickets Proceeds from bond issues
ANS:
b
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
53.
54.
55.
Topic: General fund accounting for revenues LO 3 Using modified accrual accounting, the general fund records tax revenues related to 2024 in 2024 as a. b. c. d.
Collections of 2024 taxes. Collections of 2024 taxes less estimated uncollectible taxes for 2024. Tax bills sent out for 2024 taxes less estimated uncollectible taxes for 2024. Collections of 2024 taxes plus 2024 taxes expected to be collected within 60 days of year-end.
ANS:
d
Topic: Property tax revenues LO 3 At the start of 2024, a county general fund issues property tax bills in the amount of $10,000,000. It expects to collect $9,800,000 from property owners, with the rest expected to be uncollectible. During the year, $9,500,000 in 2024 property taxes is collected. Of the remaining $500,000 in uncollected taxes at year-end, it is estimated that $250,000 will be collected within 60 days and the rest are uncollectible. Property tax revenue for 2024 is: a. b. c. d.
$ 9,800,000 $ 9,500,000 $ 9,750,000 $10,000,000
ANS:
c $9,500,000 + $250,000 = $9,750,000
Topic: Property tax revenues LO 3 At the start of 2024, a county general fund issues property tax bills in the amount of $10,000,000. It expects to collect $9,800,000 from property owners, with the rest expected to be uncollectible. During the year, $9,500,000 in 2024 property taxes is collected. Of the remaining $500,000 in uncollected taxes at year-end, it is estimated that $250,000 will be collected within 60 days, $100,000 will be collected later in the year, and the rest are uncollectible. The general fund reports a year-end allowance for uncollectible taxes in the amount of a. b. c. d.
$200,000 $150,000 $250,000 $300,000
ANS:
b $500,000 - $250,000 - $100,000 = $150,000.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-15
Use the following information to answer Questions 56 – 58. At the beginning of 2024, the balance sheet of a county general fund reports $500,000 in property taxes receivable from 2023, of which $350,000 are considered uncollectible. During 2024 the county sends out tax bills in the amount of $10,000,000, of which $600,000 are expected to be uncollectible. Cash collections on 2023 taxes are $140,000, and the remaining uncollected taxes are written off. Cash collections on 2024 taxes are $9,500,000. Of the $500,000 uncollected at the end of 2024, $100,000 are expected to be collected within 60 days, $65,000 are expected to be collected more than 60 days after year-end, and the rest are uncollectible. 56.
57.
Topic: Property tax revenues LO 3 How does activity in 2024 related to 2023 taxes affect 2024 property tax revenue? a. b. c. d.
Increase of $140,000. Increase of $10,000. Reduction of $10,000. No effect
ANS:
c Expected revenues already accrued in 2023 were $150,000 (= $500,000 – $350,000). Actual collections in 2024 were $140,000. Therefore, 2024 property tax revenue is reduced by $10,000 (= $150,000 – $140,000).
Topic: Property tax revenues LO 3 What are total property tax revenues for 2024, related to 2024 tax bills? a. b. c. d.
$10,000,000 $ 9,400,000 $ 9,500,000 $ 9,600,000
ANS:
d Tax revenues recorded when the tax bills are sent + Adjustment in 2024 allowance at year-end Total
$10,000,000 – $600,000 = $600,000 – ($500,000 – $100,000) =
Alternative calculation: Cash collections on 2024 taxes Amounts expected to be collected within 60 days Total
©Cambridge Business Publishers, 2023 10-3
$9,400,000 200,000 $9,600,000
$9,500,000 100,000 $9,600,000
Advanced Accounting, 5th Edition
58.
Topic: Property tax revenues LO 3 The general fund’s balance sheet at the end of 2024 will include: a. b. c. d.
Property taxes receivable, net of uncollectibles, of $100,000 Deferred inflows of $65,000 Property taxes receivable, net of uncollectibles, of $500,000 Deferred inflows of $165,000
ANS:
b The entries related to 2024 taxes are: Property taxes receivable Allowance for uncollectible taxes Property tax revenues
10,000,000
Cash
9,500,000
600,000 9,400,000
Property taxes receivable Allowance for uncollectible taxes
9,500,000 265,000
Property tax revenues Deferred inflows
200,000 65,000
Therefore, property taxes receivable = $10,000,000 – $9,500,000 = $500,000; the allowance for uncollectible taxes = $600,000 – $265,000 = $335,000; and deferred tax inflows are $65,000. Use the following information to answer Questions 59 – 61. On January 1, 2023, a county government sends out property tax bills in the amount of $50,000,000. Of this amount, $5,000,000 is estimated to be uncollectible. During the year, $43,000,000 is collected. Of the $7,000,000 in uncollected taxes at December 31, 2023, $3,000,000 is expected to be collected within the next 60 days, and $1,000,000 is expected to be collected after 60 days. The rest are estimated to be uncollectible. In 2024, $6,000,000 is collected related to 2023 tax bills, and the remaining uncollected 2023 taxes are written off. 59.
Topic: Property tax revenues LO 3 What is the balance in the allowance for uncollectible taxes on the December 31, 2023 general fund balance sheet? a. b. c. d.
$7,000,000 $6,000,000 $5,000,000 $3,000,000
ANS:
d Uncollected taxes at year-end = $50,000,000 – $43,000,000 = $7,000,000 Uncollectible amount = ($7,000,000 - $3,000,000 - $1,000,000) = $3,000,000
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-17
60.
Topic: Property tax revenues LO 3 What is the balance for property tax revenues, as reported on the general fund operating statement for 2023? a. b. c. d.
$45,000,000 $43,000,000 $46,000,000 $44,000,000
ANS:
c Entries for 2023 are as follows: Property taxes receivable Allowance for uncollectible taxes Property tax revenues
50,000,000
Cash
43,000,000
5,000,000 45,000,000
Property taxes receivable Allowance for uncollectible taxes
43,000,000 2,000,000
Deferred inflows Property tax revenues
1,000,000 1,000,000
$45,000,000 + $1,000,000 = $46,000,000 Or, cash collected plus cash expected to be collected within 60 days = $43,000,000 + $3,000,000 = $46,000,000. 61.
Topic: Property tax revenues LO 3 How much property tax revenue, related to 2023 tax bills, is reported in 2024? a. b. c. d.
$3,000,000 $6,000,000 $5,000,000 $4,000,000
ANS:
a Entries for 2024 are as follows: Cash
6,000,000 Property taxes receivable
Deferred inflows
6,000,000 1,000,000
Property tax revenues Allowance for uncollectible taxes
3,000,000 Property taxes receivable Property tax revenues
©Cambridge Business Publishers, 2023 10-3
1,000,000
1,000,000 2,000,000
Advanced Accounting, 5th Edition
$1,000,000 + $2,000,000 = $3,000,000. Or, 2023 unpaid taxes reported as revenues in 2023 = $3,000,000. Actual amounts collected = $6,000,000. $6,000,000 - $3,000,000 = $3,000,000 tax revenues recognized in 2024. Use the following information to answer questions 62 - 64 below: The adjusted beginning and ending balances of three of a county’s general fund accounts for 2024 are below. All accounts relate to property taxes, and deferred inflows relate to taxes receivable that are not considered available at year-end.
Taxes receivable Allowance for uncollectible taxes Deferred inflows
December 31, 2024 $500,000 (140,000) (15,000)
January 1, 2024 $480,000 (120,000) (10,000)
The county sent out 2024 property tax bills totaling $8,500,000 at the beginning of the year, of which 3% were considered uncollectible. During 2024, $8,100,000 was collected in cash, including $425,000 related to past-due taxes from 2023. The county writes off all balances related to 2023 taxes by the end of 2024. 62.
63.
Topic: Property taxes LO 3 Of the total 2024 taxes still unpaid at year-end, how much tax does the county expect to collect within 60 days of year-end? a. b. c. d.
$360,000 $485,000 $345,000 $500,000
ANS:
c $345,000 = $500,000 - $140,000 - $15,000.
Topic: Property taxes LO 3 How much tax revenue does the county record in 2024 related to 2023 taxes? a. b. c. d.
$75,000 increase in tax revenue $425,000 increase in tax revenue $90,000 reduction in tax revenue $130,000 reduction in tax revenue
ANS:
a $75,000 = $480,000 - $425,000 - $120,000 - $10,000.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-19
64.
Topic: Property taxes LO 3 How much tax revenue does the county record in 2024 related to 2024 taxes? a. b. c. d.
$7,520,000 $8,445,000 $8,035,000 $8,020,000
ANS:
d $8,020,000 = $500,000 + ($8,100,000 - $425,000) - $140,000 - $15,000.
Summary entries for questions 62 – 64 are provided below: Cash 425,000 Allowance for uncollectible taxes 120,000 Deferred inflows 10,000 Taxes receivable Tax revenues To record collections of 2023 taxes and to write off the remaining balances. Taxes receivable Cash Tax revenues Allowance for uncollectible taxes Deferred inflows To record 2024 taxes, collections, and adjustments. 65.
480,000 75,000
500,000 7,675,000 8,020,000 140,000 15,000
Topic: Purchases of goods and services LO 3 A government orders services in the amount of $3,000,000 and records the order as an encumbrance. When the services are provided, the invoice is in the amount of $3,002,000. Which statement below is true? a. b. c. d.
When the invoice is received, the encumbrance account is credited for $3,000,000. When the invoice is received, fund balance—assigned is debited for $3,002,000. When the order is placed, fund balance—assigned is credited for $3,002,000. When the order is placed, expenditures are debited for $3,000,000.
ANS:
a
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
66.
67.
Topic: Supplies inventories LO 3 A general fund uses the consumption method to record inventories. Beginning inventories are $10,000, purchases are $600,000, and ending inventories are $12,500. The general fund will report inventory expenditures of: a. b. c. d.
$600,000 $602,500 $612,500 $597,500
ANS:
d Inventories used = $10,000 + $600,000 – $12,500 = $597,500
Topic: Supplies inventories LO 3 A general fund uses the consumption method to record inventories. Beginning inventories are $10,000, purchases are $600,000, and ending inventories are $12,500. The general fund records an end-of-year adjusting entry that: a. b. c. d.
Debits nonspendable fund balance by $2,500 Credits nonspendable fund balance by $12,500 Debits unassigned fund balance by $2,500 Debits nonspendable fund balance by $12,500
ANS:
c
Use the following information to answer questions 68 – 70. A county’s general fund has $4,000,000 in supplies on hand at the start of 2024. $25,000,000 in supplies and uses supplies costing $26,000,000 during 2024. 68.
It purchases
Topic: Supplies inventories LO 3 If the county uses the consumption method to report supplies inventories, what balances appear in the general fund financial statements for 2024? a. b. c. d.
Expenditures of $26,000,000 and fund balance—nonspendable of $3,000,000 Expenditures of $25,000,000 and no nonspendable fund balance Expenditures of $25,000,000 and fund balance—nonspendable of $3,000,000 Expenditures of $26,000,000 and no nonspendable fund balance
ANS:
a Supplies on hand at the end of 2024 = $3,000,000 Expenditures = supplies used = $26,000,000
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-21
69.
70.
71.
Topic: Supplies inventories LO 3 If the county uses the purchases method to report supplies inventories, what balances appear in the general fund financial statements for 2024? Assume the supplies inventories are not material. a. b. c. d.
Expenditures of $26,000,000 and fund balance—nonspendable of $3,000,000 Expenditures of $25,000,000 and no nonspendable fund balance Expenditures of $25,000,000 and fund balance—nonspendable of $3,000,000 Expenditures of $26,000,000 and no nonspendable fund balance
ANS:
b The purchases method reports no supplies inventories on the balance sheet unless they are material. Expenditures = supplies purchased = $25,000,000
Topic: Supplies inventories LO 3 If the consumption method is used, what adjusting entry is required at year-end? a. b. c. d.
Debit fund balance—nonspendable, credit supplies inventory for $1,000,000. Debit supplies inventory, credit fund balance—unassigned for $1,000,000 Debit fund balance—unassigned, credit fund balance—nonspendable for $1,000,000 Debit fund balance—nonspendable, credit fund balance—unassigned for $1,000,000
ANS:
d
Topic: Interfund transactions LO 3 A general fund makes payments to the debt service fund, as follows: • • •
$4,500,000, as legally authorized in the budget, for payment of principal due on general obligation debt $3,000,000, as legally authorized in the budget, for payment of interest due on general obligation debt $1,000,000 temporary transfer, to be paid back when the debt service fund receives funding from other sources
The above transactions reduce the general fund’s fund balance—unassigned by what amount? a. b. c. d.
$7,500,000 $8,500,000 $3,000,000 $4,000,000
ANS:
a The legally authorized transfers are other financing uses, deducted from fund balance: $4,500,000 + $3,000,000 = $7,500,000 The temporary transfer is a receivable and does not affect fund balance.
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
72.
Topic: Interfund transactions LO 3 A municipality’s general fund transmits cash to the debt service fund to finance principal payments on general obligation debt. The debt service fund is not expected to pay the general fund back. How will this transaction be recorded by the general fund and the debt service fund? a. b. c. d.
General Fund Increase in current receivables Expenditure Other financing use Other financing use
ANS:
d
Debt Service Fund Increase in current payables Revenue Increase in current payables Other financing source
Use the following information to answer Questions 73 - 76. A county acquires equipment for $16,000,000 at the beginning of 2018. The equipment has an 8-year life, no residual value. At the beginning of 2024 (6 years later), the equipment is sold for $9,000,000. Use straight-line depreciation, if appropriate. 73.
74.
Topic: Capital assets LO 3 The equipment is used for a parking garage and is reported in an enterprise fund. What is reported in the enterprise fund’s operating statement, related to this equipment, in 2018? a. b. c. d.
The equipment is not reported in the operating statement Expense of $16,000,000 Expense of $2,000,000 Expenditure of $16,000,000
ANS:
c Using full accrual accounting, the equipment is capitalized and depreciated; depreciation expense for 2018 = $16,000,000/8 = $2,000,000.
Topic: Capital assets LO 3 The equipment is used for general operations and is reported in the general fund. What is reported in the general fund’s operating statement, related to this equipment, in 2018? a. b. c. d.
The equipment is not reported in the operating statement Expense of $16,000,000 Expense of $2,000,000 Expenditure of $16,000,000
ANS:
d Using the modified accrual basis, the equipment is an expenditure when purchased.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-23
75.
76.
77.
Topic: Capital assets LO 3 The equipment is used for a parking garage and is reported in an enterprise fund. What is reported in the enterprise fund’s operating statement, related to this equipment, in 2024? a. b. c. d.
Other financing source, $9,000,000 Gain on sale, $5,000,000 Revenue, $9,000,000 Loss on sale, $7,000,000
ANS:
b Using full accrual accounting, the book value of the equipment is $16,000,000 – [($16,000,000/8) x 6] = $4,000,000. Gain on sale = $9,000,000 – $4,000,000 = $5,000,000.
Topic: Capital assets LO 3 The equipment is used for general operations and is reported in the general fund. What is reported in the general fund’s operating statement, related to this equipment, in 2024? a. b. c. d.
Other financing source, $9,000,000 Gain on sale, $5,000,000 Revenue, $9,000,000 Loss on sale, $7,000,000
ANS:
a Using modified accrual accounting, the $9,000,000 proceeds from the sale appear as an other financing source on the fund’s operating statement.
Topic: Long-term debt LO 3 A county government borrows $2,000,000 from a local bank at the beginning of 2023, to fund general operations. Principal and $50,000 in interest ($25,000 per year) are both due two years later when the loan is repaid at the end of 2024. The loan is reported in the general fund. Which statement below is true concerning the general fund? a. b. c. d.
Fund balance is not affected in 2023. Fund balance is reduced by $25,000 in 2023. Fund balance decreases by $2,050,000 in 2024. Fund balance decreases by $2,000,000 in 2024.
ANS:
c When the general fund receives the loan in 2023, it credits other financing sources, which adds to fund balance. The interest is not reported until 2024, the year it is due. Both principal and interest payments are reported as expenditures and reduce fund balance when paid.
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
78.
Topic: Long-term debt LO 3 The general fund has the following transactions for 2024: • • • •
Issued $1,000,000 face value bonds with a coupon rate of 3%. Made a $100,000 principal payment on the bonds. Made a $25,000 interest payment on the bonds. Accrued interest due in 2025 on the bonds is $5,000.
What is the effect of the above transactions on the general fund’s fund balance in 2024?
79.
80.
a. b. c. d.
$30,000 decrease $875,000 increase $25,000 decrease $970,000 increase
ANS:
b $1,000,000 other financing source: bond proceeds – $100,000 expenditure: principal – $25,000 expenditure: interest = $875,000 increase
Topic: Capital assets and long-term debt LO 3 At the end of the year, a county’s general fund acquires equipment with a 10-year estimated life and finances it with a $8,000,000 loan. How is this recorded in the general fund’s statement of revenues, expenditures, and changes in fund balances? a. b. c. d.
$8,000,000 expenditures and $8,000,000 other financing sources. $8,000,000 other financing uses and $8,000,000 other financing sources. $8,000,000 revenues and $8,000,000 expenditures. Not recorded; this transaction only affects the balance sheet.
ANS:
a
Topic: General fund budget and closing entries LO 3 A county’s general fund has the following results for fiscal 2024:
Revenues Expenditures Other financing uses
Budget $ 405,000 380,000 30,000
Actual $ 400,000 375,000 28,000
If the general fund’s balance in fund balance–unassigned before the budget entry was $26,000, what is its balance at the end of fiscal 2024, after closing entries? a. b. c. d.
$29,000 $23,000 $18,000 $16,000
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-25
ANS:
b $26,000 + $400,000 – $375,000 – $28,000 = $23,000
Use the following information to answer Questions 81 - 83. A county’s general fund has $2,000,000 in purchase orders outstanding at the beginning of 2024. The orders are delivered in 2024 and the county pays the suppliers $2,000,000. Expenditures ordered, delivered and paid for in 2024 total $30,000,000. Near the end of 2024, encumbrances for $4,000,000 in purchase orders are recorded. Encumbrances are reported in fund balance—assigned. 81.
82.
83.
Topic: Outstanding encumbrances LO 3 Using the legal budgetary basis, what amount does the county report for expenditures in 2024? a. b. c. d.
$34,000,000 $32,000,000 $30,000,000 $28,000,000
ANS:
a $30,000,000 + $4,000,000 = $34,000,000
Topic: Outstanding encumbrances LO 3 Using the GAAP budgetary basis, what amount does the county report for expenditures in 2024? a. b. c. d.
$34,000,000 $32,000,000 $30,000,000 $28,000,000
ANS:
b $30,000,000 + $2,000,000 = $32,000,000
Topic: Outstanding encumbrances LO 3 At the end of 2024, to what fund balance account are the $2,000,000 in expenditures related to beginning-of-year encumbrances closed, using each basis of reporting? a. b. c. d.
Legal Budgetary Basis Fund balance—assigned Fund balance—unassigned Fund balance—assigned Fund balance—unassigned
ANS:
a
©Cambridge Business Publishers, 2023 10-3
GAAP Budgetary Basis Fund balance—unassigned Fund balance—assigned Fund balance—assigned Fund balance—unassigned
Advanced Accounting, 5th Edition
84.
85.
Topic: Year-end encumbrances LO 3 Encumbrances for $900,000 in purchase orders are outstanding at the beginning of 2024. Encumbrances for $800,000 in purchase orders are outstanding at the end of 2024. Which statement is true concerning a comparison of legal budgetary and GAAP budgetary expenditures for 2024? a. b. c. d.
Legal budgetary basis expenditures are $800,000 higher. GAAP budgetary basis expenditures are $100,000 higher. Legal budgetary basis expenditures are $100,000 higher. GAAP budgetary basis expenditures are $900,000 higher.
ANS:
b The legal basis includes the $800,000 in ending outstanding purchase orders in 2024 expenditures, while the GAAP basis excludes these orders and includes the beginning purchase orders of $900,000. Therefore, GAAP basis expenditures are $100,000 higher.
Topic: Year-end encumbrances LO 3 A county uses the GAAP basis to report encumbrances. At the end of 2024 there are purchase orders outstanding, for which the goods have not yet been delivered, for $40,000. Which statement below is false? a. b.
Expenditures for 2024 will include the $40,000 purchase orders. An entry will be made at the start of 2025 to increase fund balance–unassigned by $40,000. If the actual cost of the orders turns out to be $42,000, then $42,000 will be reported as expenditures for 2025. The expenditures connected with the purchase orders outstanding at the end of 2024 are not separated from expenditures initiated in 2025.
c. d. ANS:
a
Use the following information to answer Questions 86 and 87. Below is the preclosing trial balance of a town’s general fund at year-end:
Cash Property taxes receivable, net Estimated revenues Estimated other financing sources Operating expenditures Accounts payable Appropriations Property tax revenues Bond proceeds Fund balance—unassigned
Test Bank, Chapter 10
Dr $ 8,000 56,000 982,000 10,000 989,000
_________ $ 2,045,000
Cr
40,000 990,000 985,000 10,000 20,000 $ 2,045,000
©Cambridge Business Publishers, 2023 10-27
86.
87.
Topic: Fund balance LO 3 What was the credit balance in fund balance—unassigned at the beginning of the year, before the budget entry was made? a. b. c. d.
$18,000 $22,000 $ 2,000 $28,000
ANS:
a The budget entry increased fund balance by $982,000 + $10,000 - $990,000 = $2,000; $20,000 - $2,000 = $18,000.
Topic: Fund balance LO 3 What is the fund balance—unassigned balance, appearing on the general fund’s year-end balance sheet? a. b. c. d.
$16,000 credit $24,000 credit $26,000 credit $18,000 credit
ANS:
b $18,000 + $985,000 + $10,000 - $989,000 = $24,000 credit
Use the following information to answer Questions 88 – 92. Below is the preclosing trial balance of a county’s general fund at year-end: Dr Cash $ 45,000 Property taxes receivable 180,000 Due from other funds 25,000 Estimated revenues 2,300,000 Operating expenditures 1,963,000 Capital outlay 120,000 Debt service: Principal 50,000 Debt service: Interest 140,000 Transfers out 29,000 Allowance for uncollectible property taxes Accounts payable Due to other funds Appropriations Estimated other financing uses Property tax revenues Fund balance—unassigned _________ $ 4,852,000 ©Cambridge Business Publishers, 2023 10-3
Cr
$ 150,000 45,000 22,000 2,275,000 30,000 2,295,000 35,000 $ 4,852,000
Advanced Accounting, 5th Edition
88.
89.
90.
91.
Topic: General fund budget entry LO 3 What was the credit balance in fund balance - unassigned at the beginning of the year, before the budget entry was made? a. b. c. d.
$40,000 $30,000 $35,000 $25,000
ANS:
a The budget entry reduced the fund balance by ($2,275,000 + $30,000 – $2,300,000) = $5,000; $35,000 + $5,000 = $40,000
Topic: General fund closing entries LO 3 What is the year-end balance in fund balance—unassigned? a. b. c. d.
$11,000 $62,000 $28,000 $33,000
ANS:
d $40,000 + $2,295,000 - $1,963,000 - $120,000 - $50,000 - $140,000 - $29,000 = $33,000.
Topic: General fund financial statements LO 3 On the general fund operating statement, what is the total for other financing uses? a. b. c. d.
$29,000 $-0$79,000 $30,000
ANS:
a The only other financing uses listed are transfers out of $29,000.
Topic: General fund financial statements LO 3 The general fund’s year-end balance sheet will report total liabilities of: a. b. c. d.
$ 45,000 $195,000 $ 67,000 $217,000
ANS:
c $45,000 + $22,000 = $67,000
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-29
92.
Topic: General fund financial statements LO 3 On the general fund operating statement, what are total expenditures? a. b. c. d.
$2,302,000 $2,273,000 $2,103,000 $2,223,000
ANS:
b $1,963,000 + $120,000 + $50,000 + $140,000 = $2,273,000
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
PROBLEMS 1.
Topic: Identifying funds LO 2 The following fund types are used by the State of South Dakota: General Fund (GF) Special Revenue Fund (SRF) Capital Projects Fund (CPF) Debt Service Fund (DSF) Permanent Fund (PF)
Enterprise Fund (EF) Internal Service Fund (ISF) Pension and Other Employee Benefit Trust Fund (POEBTF) Private-Purpose Trust Fund (PPTF) Custodial Fund (CF)
Required For each of the activities below, indicate the state fund type that reports the activity. Use the abbreviations listed above. a.
Accounts for receipt of federal grants, state motor fuel taxes, and state motor vehicle excise taxes, and use of these resources for maintenance of highways, bridges, and public transportation.
b.
Accounts for operations of the State Lottery. Transfers out are used to support general government activities, construction, and social services.
c.
Provides interest-bearing loans to local governments for pollution control projects.
d.
Accounts for proceeds from the sale of the state cement plant. Income from investment of proceeds is used to support public education.
e.
Accounts for receipts of sales and use taxes and specialized taxes, and expenditures for education, health, human and social services, and public protection.
f.
Accounts for resources held in trust for pension beneficiaries.
g.
Accounts for child support payments collected by the Department of Social Services.
h.
Accounts for revenue from the federal tobacco settlement. Income from investment of revenues is used for public education enhancement programs.
i.
Accounts for activities that provide telecommunications services on a costreimbursement basis to governmental units within the State.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-31
ANS: a. b. c. d. e. 2.
SRF EF EF PF GF
f. g. h. i.
POBETF CF PF ISF
Topic: Identifying funds LO 2 The following fund types are used by the State of Florida: General Fund (GF) Special Revenue Fund (SRF) Capital Projects Fund (CPF) Debt Service Fund (DSF) Permanent Fund (PF) Enterprise Fund (EF)
Internal Service Fund (ISF) Private-Purpose Trust Fund (PPTF) Pension and Other Employee Benefit Trust Fund (POEBTF) Investment Trust Fund (ITF) Custodial Fund (CF)
Required For each of the activities below, indicate the state fund type that reports the activity. Use the abbreviations listed above. a.
Accounts for operations of the Florida Turnpike.
b.
Accounts for contributions from participants of the College Savings Plan (529 Plan).
c.
Accounts for operations of government employees’ deferred compensation plan.
d.
Accounts for operations of the marine resources conservation program, financed by federal grants.
e.
Accounts for monies set aside to help cover insurers’ losses from hurricane disasters.
f.
Accounts for the operations of the state lottery.
g.
Accounts for resources held for students in the Florida School for the Deaf and Blind.
h.
Accounts for services provided by data processing centers to various government entities.
i.
Accounts for monies received for licenses and permits.
j.
Accounts for private scholarship funds used to pay scholarships as specified by the contributors. Only interest income from contributions may be used.
ANS: a. b. c.
EF PPTF POEBTF
d. e. f.
©Cambridge Business Publishers, 2023 10-3
SRF SRF EF
g. h. i.
CF ISF GF
j.
PF
Advanced Accounting, 5th Edition
3.
Topic: Identifying funds LO 2 The following fund types are used by a county: General Fund (GF) Special Revenue Fund (SRF) Capital Projects Fund (CPF) Debt Service Fund (DSF)
Permanent Fund (PF) Enterprise Fund (EF) Internal Service Fund (ISF) Custodial Fund (CF)
Required For each of the transactions below, indicate the fund or funds affected. Be sure to include all funds that report the transaction. Use the abbreviations listed above. a.
The general fund transfers funding for payment of principal and interest on general obligation debt.
b.
General obligation debt principal is paid.
c.
Wages for municipal recreation center employees are paid.
d.
The county receives a state grant to maintain the public parks.
e.
The county receives an endowment, where the income from the endowment is to be used to maintain public bike paths.
f.
Payroll withholdings are paid to appropriate federal and state agencies.
g.
Equipment is purchased by the general fund.
h.
Extra money left over from a construction project is set aside for payment of interest on general obligation bonds used to finance the project.
i.
Community college faculty salaries are paid.
ANS: a. b. c. d. e.
GF, DSF DSF EF or GF SRF PF
Test Bank, Chapter 10
f. g. h. i.
CF GF CPF, DSF EF
©Cambridge Business Publishers, 2023 10-33
4.
Topic: Identifying funds LO 2 The following fund types are used by Cumberland County: General Fund (GF) Special Revenue Fund (SRF) Capital Projects Fund (CPF) Debt Service Fund (DSF)
Internal Service Fund (ISF) Enterprise Fund (EF) Pension Trust Fund (PTF) Custodial Fund (CF)
Required For each of the activities below, indicate the county fund type that reports the activity. Use the abbreviations listed above. a.
Accounts for employee retirement contributions, earnings, investments and obligations.
b.
Accounts for the operation of the County nursing and rehabilitation center.
c.
Accounts for monies received from federal, state and local sources to protect the safety and welfare of children.
d.
Accounts for County payments of general obligation debt principal and interest.
e.
Accounts for work release earnings and disbursements for individuals incarcerated at the County prison.
f.
Accounts for general tax revenues.
g.
Accounts for the County’s workers’ health reimbursement arrangement.
h.
Accounts for expenditures for services to County citizens with developmental disabilities, funded by federal and state grants.
i.
Accounts for monies set aside pre-tax by employees in the County’s flexible spending plan to pay for daycare costs of dependent children or parents.
j.
Accounts for receipt of monies from bond issues to be used for construction of County facilities.
k.
Accounts for monies received through the County’s participation in the state’s managed care program.
l.
Accounts for County administrative costs.
m.
Accounts for funds collected for another county’s participation in the state’s managed care program.
ANS: a. b. c.
PTF EF SRF
d. e. f.
DSF CF GF
©Cambridge Business Publishers, 2023 10-3
g. h. i.
ISF SRF CF
j. k. l.
CPF SRF GF
m.
CF
Advanced Accounting, 5th Edition
5.
Topic: Identifying funds LO 2 The following fund types are used by Callaway County: General Fund (GF) Special Revenue Fund (SRF) Capital Projects Fund (CPF) Debt Service Fund (DSF) Permanent Fund (PF)
Enterprise Fund (EF) Private Purpose Trust Fund (PPTF) Investment Trust Fund (ITF) Custodial Fund (CF)
Required For each of the transactions below, indicate the county fund(s) affected. Be sure to include all funds that report the transaction. Use the abbreviations listed above. a.
A citizen gives $1,000,000 to the county. The citizen specifies that this gift is to be used to provide health services to the general public.
b.
A citizen gives $1,000,000 to the county. The citizen specifies that income from investment of this gift is to be used to provide health services to the general public.
c.
Other county governments give money to the county for short-term investments.
d.
Money is spent to develop architectural plans for a new waterfront mall.
e.
Wages for administrative workers in the controller’s office are paid.
f.
Money from property tax collections is dedicated to enhanced 911 funding.
g.
Last year the county received a federal grant to replace trees in public parks that were damaged by hurricanes. The county spends some of this money to plant new trees.
h.
The general fund provides a temporary loan to the infrastructure fund to help with initial financing of a project to rebuild a county bridge.
i.
Assets of wards of the county are reported in this fund.
j.
The sales tax rate for Callaway County is 8.75%. Of that amount, 4% represents the state tax rate. Callaway County remits the state tax portion of its sales tax collections to the state.
k.
Callaway County Community College receives tuition from students.
l.
A federal grant provides funding for sewer improvements.
m.
Principal payments on general obligation bonds are made.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-1
ANS: a. b. c. d. e. f. g. 6.
SRF PF ITF CPF GF GF, SRF SRF
h. i. j. k. l. m.
CPF, GF PPTF CF EF CPF (and SRF if the money flows through a SRF first) DSF
Topic: Fund statement reporting LO 2 A list of account titles that may appear in the governmental and/or proprietary funds balance sheet/statement of net position of a state or local government are as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Cash and cash equivalents Accumulated depreciation Transfers out Accounts payable to other funds Loss on sale of capital assets Assigned fund balance Social services expenditures Restricted net position Capital assets: equipment Bonds payable
Required For each account title, indicate whether it might appear on a governmental (G) or proprietary funds (P) balance sheet/statement of net position, or on both statements (B), or on none (N). ANS: 1. 2. 3. 7.
B P N
4. 5. 6.
B N G
7. 8. 9.
N P P
10.
P
Topic: Fund statement reporting LO 2 A list of account titles that may appear in the governmental and/or proprietary funds operating statement of a state or local government are as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Transfers to other funds Accumulated depreciation Interest expense Accounts payable to other funds Gain on sale of equipment License, permit, and fee revenue Social services expenditures Debt service: principal Capital assets: equipment Bonds payable
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
Required For each account title, indicate whether it might appear on a governmental (G) or proprietary funds (P) operating statement, or on both statements (B), or on none (N). ANS: 1. 2. 3. 8.
B N P
4. 5. 6.
N P B
7. 8. 9.
G G N
10.
N
Topic: Fund balance classifications LO 3 A county’s general fund reports fund balances totaling $3,000,000. Additional information for the general fund is as follows: • • • • •
Prepaid expenses are $200,000. Inventories total $600,000. Cash held from a state grant designated for Covid-19 relief totals $500,000. The legal budget requires that $1,000,000 be set aside for general debt obligation payments. Outstanding purchase orders total $50,000.
Required Prepare the county’s fund balances section of the general fund balance sheet. ANS: Fund balances: Nonspendable (1) Restricted Committed Assigned Unassigned Total fund balances
$
800,000 500,000 1,000,000 50,000 650,000 $ 3,000,000
(1) $200,000 + $600,000 = $800,000
9.
Topic: Fund balance classifications LO 3 A state’s general fund reports fund balances totaling $6.7 billion. Additional information for the general fund is as follows: • • • • •
Inventories and prepaid expenses total $18 million. Long-term receivables total $2.6 million. State legislation requires that $1.2 billion of general fund resources be used for specific purposes. $27.5 million of general fund resources are limited by the federal government to specific uses. Grantors and contributors specify that $43.5 million of general fund resources be used for specific purposes.
Required Prepare the state’s fund balances section of the general fund balance sheet. Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-3
ANS: Fund balances (in millions): Nonspendable (1) Restricted (2) Committed Unassigned (3) Total fund balances
$
20.6 71.0 1,200.0 5,408.4 $ 6,700.0
(1) $18 + $2.6 = $20.6 (2) $27.5 + 43.5 = $71.0 (3) $6,700.0 - $20.6 - $71.0 - $1,200.0 = $5,408.4
10.
Topic: General fund budget and closing entries LO 3 New York State’s general fund budget and actual information for fiscal 2021 appear below. All dollar amounts are in millions.
(1) Spending authority for general state charges was not exceeded. The final financial plan shown does not reflect last-minute approved increases in spending authority.
Use the “final” financial plan (budget) amounts when answering the questions below. Assume New York State’s general fund separates its other financing sources (uses) into sources and uses when preparing its budget and closing entries. Required a. Prepare the fiscal 2021 budget entry for the general fund. b. Prepare the fiscal 2021 closing entries for the general fund.
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
ANS: (in millions) a. Estimated revenues Estimated other financing sources Fund balance—unassigned
45,746 27,294 1,707 Appropriations Estimated other financing uses
68,710 6,037
b. Revenues Other financing sources
48,190 26,122 Estimated revenues Estimated other financing sources Fund balance—unassigned
Appropriations Estimated other financing uses
27,294 1,272 68,710 6,037
Expenditures Other financing uses Fund balance—unassigned
Test Bank, Chapter 10
45,746
66,117 7,978 652
©Cambridge Business Publishers, 2023 10-5
11.
Topic: General fund budget and closing entries LO 3 The fiscal 2020 budgetary comparison statement for the general fund of the State of California appears below. All dollar amounts are in thousands.
Use the “final budget” amounts when answering the questions below. Required a. Prepare the fiscal 2020 budget entry for the general fund. b. Prepare the fiscal 2020 closing entries for the general fund. c. If the general fund reported a fund balance of $10,205,786 thousand at the beginning of the year, what is its fund balance at year-end?
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
ANS: (in thousands) a. Estimated revenues Fund balance—unassigned
140,835,000 7,819,011 Appropriations
148,654,011
b. Revenues Fund balance—unassigned
124,209,269 16,625,731 Estimated revenues
Appropriations Fund balance—unassigned
140,835,000 148,654,011 3,318,941
Expenditures Other financing uses c. 12.
144,662,059 7,310,893
$10,205,786 - $7,819,011 - $16,625,731 - $3,318,941 = $(17,557,897)
Topic: General fund budget and closing entries LO 3 A county’s general fund has the following budget for the current year: Estimated revenues…………………………………………. $4,500,000 Appropriations………………………………………………… 5,200,000 Estimated other financing sources…………………… 800,000 Estimated other financing uses……………………….. 75,000 During the year, actual results were as follows: Revenues………………………………………………………… 4,300,000 Expenditures…………………………………………………… 5,150,000 Other financing sources………………………………….. 850,000 Other financing uses……………………………………….. 70,000 The general fund’s unassigned fund balance at the beginning of the year was $150,000. Required a. Calculate unassigned fund balance immediately after the budget entry. b. Calculate unassigned fund balance at the end of the year. ANS: a.
The budget entry adds $25,000 to fund balance; $25,000 = $4,500,000 + $800,000 - $5,200,000 - $75,000. Therefore, fund balance after the budget entry is $150,000 + $25,000 = $175,000.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-7
b.
Closing entries are as follows: Revenues Other financing sources Fund balance—unassigned
4,300,000 850,000 150,000 Estimated revenues Estimated other financing sources
Appropriations Estimated other financing uses
4,500,000 800,000 5,200,000 75,000
Expenditures Other financing uses Fund balance—unassigned
5,150,000 70,000 55,000
Fund balance at the end of the year = $175,000 - $150,000 + $55,000 = $80,000. 13.
Topic: Property taxes and fund balance LO 3 On March 1, a county levied property taxes of $20,000,000. Based on past experience, town management estimated that the town will not collect 4% of the taxes billed. Taxes were due September 30, but $4,925,000 was received before that date from taxpayers taking advantage of a 1.5% discount for early payment. Discounts are reported as a reduction of revenues. On December 31, the town’s year-end, outstanding taxes totaled $1,500,000, of which $800,000 is expected to be collected during the first 60 days of the new year. Actual expenditures for the year of $18,600,000, paid in cash, equaled appropriations. The budget entry included estimated revenues of $19,300,000. Before the budget entry, the fund balance for the general fund was $4,000,000. No taxes receivable existed prior to the current year. Required a. Prepare the journal entries to record the property tax transactions, including any adjusting entries at December 31. b. Calculate the general fund’s fund balance at December 31. ANS: a. Taxes receivable 20,000,000 Allowance for uncollectible taxes Tax revenues To record tax levy and establish allowance for uncollectible taxes.
800,000 19,200,000
Cash 4,925,000 Tax revenues 75,000 Taxes receivable 5,000,000 To record collection of taxes prior to due date and reduction of revenues by 1.5% discount ($5,000,000 = $4,925,000/0.985). Cash
13,500,000 Taxes receivable 13,500,000 To record collection of taxes; $13,500,000 = $20,000,000 - $5,000,000 - $1,500,000. ©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
Allowance for uncollectible taxes 100,000 Tax revenues 100,000 To adjust the allowance for uncollectible taxes to $700,000 (= $1,500,000 – $800,000). Expenditures Cash To record expenditures for the year.
18,600,000 18,600,000
b. Fund balance, beginning of year Budget entry Actual – estimated revenues Fund balance, end of year Alternate calculation: Fund balance, beginning of year Actual revenues Actual expenditures Fund balance, end of year 14.
$19,300,000 - $18,600,000 $19,225,000 - $19,300,000
$ 4,000,000 700,000 (75,000) $ 4,625,000
$ 4,000,000 19,225,000 (18,600,000) $ 4,625,000
Topic: Property tax revenues LO 3 Morris County’s general fund has the following balances as of the beginning of 2024, pertaining to unpaid 2023 taxes: Property taxes receivable Allowance for uncollectible taxes
$8,000,000 (7,100,000)
During 2024, the County collects $1,250,000 related to 2023 taxes and writes off the rest. Property tax bills for 2024 in the amount of $125,000,000 are sent out. The county estimates that 5% are uncollectible. The County collects $115,200,000 of 2024 taxes. Of the remaining $9,800,000 in uncollected taxes for 2024, the County estimates that $1,000,000 will be collected within 60 days after the end of the year, and the remainder are uncollectible. Required a. Prepare the journal entries to record the above events. b. Calculate property tax revenue for 2024. ANS: a. Cash
1,250,000 Property taxes receivable
1,250,000
To record collection of 2023 taxes. Allowance for uncollectible taxes
7,100,000 Property taxes receivable Property tax revenue
6,750,000 350,000
To write off 2023 taxes. Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-9
Property taxes receivable
125,000,000
Allowance for uncollectible taxes Property tax revenue To record property taxes billed for 2024. Cash
6,250,000 118,750,000
115,200,000 Property taxes receivable
115,200,000
To record 2024 tax collections. Property tax revenue
2,550,000 Allowance for uncollectible taxes
2,550,000
To adjust allowance at end of year. Allowance balance should be $8,800,000; it is $6,250,000 before adjustment. b. 15.
$350,000 + $118,750,000 – $2,550,000 = $116,550,000
Topic: Property tax revenues LO 3 At the beginning of 2024, a town reports the following balances, related to 2023 taxes: Property taxes receivable Allowance for uncollectible taxes Property taxes receivable, net
$ 300,000 (160,000) $ 140,000
Cash collected in 2024 from property owners for 2023 taxes was $155,000. The remaining uncollected taxes were written off. Property tax bills were sent out at the beginning of 2024 in the amount of $4,000,000, of which $300,000 were estimated to be uncollectible. Cash collected from property owners for 2024 taxes was $3,650,000. Of the $350,000 uncollected at year-end, $100,000 in taxes are expected to be collected in the next 60 days, and $20,000 are expected to be collected more than 60 days from year-end. The remainder are considered uncollectible. Required Prepare the journal entries to record the above information in the general fund accounts. ANS: Cash
155,000 Property taxes receivable
155,000
To record collection of 2023 taxes. Allowance for uncollectible taxes
160,000 Property taxes receivable Property tax revenue
145,000 15,000
To write off 2023 taxes. ©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
Property taxes receivable
4,000,000
Allowance for uncollectible taxes Property tax revenue To record property taxes billed for 2024. Cash
300,000 3,700,000
3,650,000 Property taxes receivable
3,650,000
To record 2024 tax collections. Allowance for uncollectible taxes
70,000
Property tax revenue 50,000 Deferred inflows 20,000 To adjust allowance at end of year. Allowance balance should be $230,000; it is $300,000 before adjustment. Accrued revenue at the beginning of the year was $3,700,000; revenue to be recognized for the year = $3,650,000 cash collected + $100,000 expected to be collected within 60 days = $3,750,000. Therefore $50,000 is added to property tax revenue. 16.
Topic: Property tax revenues LO 3 Colusa County’s general fund reports the following balances for property taxes at the beginning of 2024: Property taxes receivable Allowance for uncollectible property taxes Deferred inflows—unavailable tax revenues
$ 600,000 (420,000) (30,000)
During 2024, the county sends out tax bills totaling $35,000,000, of which 3% are expected to be uncollectible. Collections are as follows: Collections on property taxes from prior years Collections on 2024 property taxes
$ 160,000 34,250,000
The remaining uncollected taxes from prior years are written off. Of the $750,000 in uncollected 2024 taxes, $200,000 is expected to be collected within 60 days of year-end and $50,000 is expected to be collected after 60 days. The remaining $500,000 is considered uncollectible. Required Prepare the journal entries to record these events, occurring in 2024: a. b. c. d.
Property tax bills for 2024 are sent out. Prior year taxes are collected in cash in 2024. The remainder are written off. 2024 taxes are collected in cash. The accounts are adjusted at the end of 2024.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-11
ANS: a. Property taxes receivable
35,000,000 Allowance for uncollectible taxes Property tax revenue
1,050,000 33,950,000
b. Cash
160,000 Property taxes receivable
Allowance for uncollectible taxes Deferred inflows—unavailable property taxes
160,000 420,000 30,000
Property taxes receivable Property tax revenue
440,000 10,000
c. Cash
34,250,000 Property taxes receivable
34,250,000
d. Allowance for uncollectible taxes
550,000 Property tax revenue Deferred inflows—unavailable property taxes
To adjust allowance at end of year. Allowance balance should be $500,000; it is $1,050,000 before adjustment. Accrued revenue at the beginning of the year was $33,950,000; revenue to be recognized for the year = $34,250,000 cash collected + $200,000 expected to be collected within 60 days = $34,450,000. Therefore $500,000 is added to property tax revenue. 17.
Accounting for Property Taxes LO 3 Alpine County’s July 1, 2023 general fund balance sheet reports the following balances related to property taxes: Dr (Cr) Property taxes receivable .………………………………………… $450,000 Allowance for uncollectible taxes …………………………….. (375,000) Deferred inflows of resources……………………………………. (5,000) The county has a June 30 fiscal year-end. The taxes receivable are uncollected fiscal 2023 taxes, and the allowance for uncollectible taxes is the amount of uncollected taxes not expected to be collected. The deferred inflows account consists of $3,000 in uncollected fiscal 2023 taxes that are expected to be collected more than 60 days after year-end, and $2,000 in fiscal 2024 taxes collected in advance. The county records the following transactions in fiscal 2024, related to property tax billings and collections.
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
500,000 50,000
1. 2. 3. 4.
Property tax bills totaling $25,000,000 are sent out. The county expects that $700,000 of these bills are uncollectible. Property taxes of $24,800,000 are collected in cash. Of this amount, $80,000 is payment for fiscal 2023 taxes, $6,000 is fiscal 2025 taxes paid in advance, and the remainder is payment of fiscal 2024 property taxes. The uncollected taxes for fiscal 2023 are written off. Of the uncollected fiscal 2024 property taxes, it is estimated that 60% will be collected within 60 days of year-end, another 10% will be collected more than 60 days after yearend, and the remainder are uncollectible.
Required a. For the $450,000 in uncollected fiscal 2023 property taxes, how much property tax revenue was reported in fiscal 2023? b. Prepare the journal entries necessary to record the activities of fiscal 2024, including fiscal year-end adjusting entries. c. What is the total amount of property tax revenue reported in fiscal 2024? ANS: a. The summary entry leading to the beginning balances for uncollected fiscal 2023 property taxes is: Taxes receivable 450,000 Allowance for uncollectible taxes 375,000 Deferred inflows of resources 3,000 Property tax revenues 72,000 Property tax revenue on uncollected fiscal 2023 taxes, reported in fiscal 2023, is $72,000. b. Taxes receivable 25,000,000 Allowance for uncollectible taxes Property tax revenues To record tax levy and establish allowance for uncollectible taxes. Cash
700,000 24,300,000
24,800,000
Taxes receivable Deferred inflows of resources To record collection of taxes.
24,794,000 6,000
Allowance for uncollectible taxes 375,000 Taxes receivable Property tax revenues To write off the allowance and the receivable for fiscal 2023 taxes.
370,000 5,000
Deferred inflows of resources 3,000 Property tax revenues 3,000 To recognize revenue on expected collections of fiscal 2023 taxes beyond the 60-day limit.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-13
Deferred inflows of resources Property tax revenues To recognize as revenue fiscal 2024 taxes collected in fiscal 2023. Allowance for uncollectible taxes Deferred inflows of resources Property tax revenues
2,000 2,000
614,200 28,600 585,600
Uncollected fiscal 2024 taxes are $286,000 (= $25,000,000 – ($24,800,000 - $80,000 - $6,000). Of this amount, $171,600 (= 60% x $286,000) are expected to be collected within 60 days of year-end and are included in revenues of fiscal 2024; $28,600 (= $286,000 x 10%) are deferred inflows expected to be collected after 60 days, and $85,800 are uncollectible. The ending allowance balance should therefore be $85,800, while it is $700,000 before adjustment. c. Fiscal 2024 tax levy: collections Fiscal 2024 tax levy: to be collected within 60 days Fiscal 2024 taxes collected in fiscal 2023 Fiscal 2023 taxes not reported as revenue but collected in fiscal 2024 ($5,000 + $3,000) Total property tax revenues reported in fiscal 2024 18.
$24,714,000 171,600 2,000 8,000 $24,895,600
Topic: Available funds LO 3 The trial balance of a general fund at April 3 appears below. The government’s fiscal year ends June 30. Dr (Cr) Cash $ 1,000,000 Property taxes receivable, net 3,000,000 Due from other funds 400,000 Estimated revenues 20,000,000 Expenditures 16,000,000 Encumbrances 1,000,000 Accounts payable (3,500,000) Property tax revenues (16,000,000) Appropriations (19,000,000) Fund balance—assigned (2,000,000) Fund balance—unassigned (900,000) Total $ 0 Required Calculate available funds as of April 3. ANS: Appropriations Less expenditures Less encumbrances Available funds
©Cambridge Business Publishers, 2023 10-3
$ 19,000,000 (16,000,000) (1,000,000) $ 2,000,000 Advanced Accounting, 5th Edition
19.
Topic: Available funds LO 3 The following excerpts are obtained from a county government’s financial records. government’s fiscal year ends December 31 and it is now November 30.
The
Dr (Cr) 100,000 1,500,000 35,000,000 (250,000) 70,000 (29,000,000) 30,000,000 245,000 100,000 (325,000)
Cash Taxes receivable, net Estimated revenues Estimated other financing uses Budgetary deficit Revenues Expenditures Other financing uses Encumbrances Fund balance—unassigned
$
Required How much does the government have available to spend for the remainder of the year? ANS: Appropriations (= $35,000,000 – $250,000 + $70,000) Estimated other financing uses Less expenditures Less other financing uses Less encumbrances Available funds 20.
$ 34,820,000 250,000 (30,000,000) (245,000) (100,000) $ 4,725,000
Topic: Inventory reporting LO 3 A county’s general fund has $600,000 in supplies on hand at the start of the year. During the year, the county purchases $10,000,000 of supplies and uses $9,850,000 of supplies. Required a. The general fund uses the consumption method to record supplies. i. Prepare the adjusting entry at the end of the year to recognize the change in inventory balance. ii. What are supplies expenditures for the year. b. The general fund uses the purchases method to record supplies, and does not report a supplies inventory on its balance sheet. What are supplies expenditures for the year. ANS: a.
i. Fund balance—unassigned
150,000 Fund balance—nonspendable
ii. b.
150,000
$9,850,000
$10,000,000
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-15
21.
Topic: Inventory reporting LO 3 A county’s general fund has $2,000,000 in supplies on hand at the start of the year. During the year, the county purchases $70,000,000 of supplies for cash, and uses $70,500,000 of supplies in operations. Required Prepare journal entries to record these events for the year, including any year-end adjusting entries, if: a. The general fund uses the consumption method to record supplies. b. The general fund uses the purchases method to record supplies and does not report supplies inventories on its balance sheet. ANS: a. Inventories
70,000,000 Cash
70,000,000
Expenditures
70,500,000 Inventories
70,500,000
Fund balance—nonspendable
500,000 Fund balance—unassigned
500,000
b. Expenditures
70,000,000 Cash
22.
70,000,000
Topic: Capital asset and debt transactions LO 3 Consider the following sets of transactions for a county having a December 31 year-end. On October 1, 2021, the County issued $5 million of 20-year, 2.5% bonds at par, with interest due every September 30. On September 30, 2022 and 2023, interest was paid as required, along with $250,000 of principal on each payment date. On January 1, 2021, the County purchased new equipment for $200,000. The equipment has an expected life of 4 years, straight-line, no salvage value. It sold the equipment for $90,000 on June 30, 2023. Required For your answers, round to the nearest dollar if necessary. a. Prepare the journal entries to record the above events for 2021 - 2023, assuming the transactions occur in the County’s general fund, using the modified accrual basis of accounting. Include any year-end adjusting entries. b. Repeat the requirements of a., assuming the transactions occur in the County’s enterprise fund, using full accrual accounting.
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
c. How would the equipment and the bonds appear on the County’s December 31, 2022 balance sheet and 2022 operating statement, using (1) modified accrual accounting, and (2) full accrual accounting? ANS: a. Entries under modified accrual accounting: Bonds 10/1/21 Cash
5,000,000
Other financing sources—bond proceeds To record issuance of bonds.
5,000,000
9/30/22 Expenditures: debt service interest 125,000 Expenditures: debt service principal 250,000 Cash To record payment of bond principal and interest; $125,000 = $5,000,000 x 2.5%. 9/30/23 Expenditures: debt service interest 118,750 Expenditures: debt service principal 250,000 Cash To record payment of bond principal and interest; $118,750 = $4,750,000 x 2.5%. Equipment 1/1/21 Expenditures – capital outlay Cash To record purchase of equipment.
368,750
200,000 200,000
6/30/23 Cash
90,000
Other financing sources—sale of capital assets To record sale of equipment. b.
375,000
90,000
Entries under full accrual accounting: Bonds 10/1/21 Cash
5,000,000
Bonds payable To record issuance of bonds.
5,000,000
12/31/21 Interest expense Interest payable To accrue bond interest; $31,250 = $5,000,000 x 2.5% x 3/12.
Test Bank, Chapter 10
31,250 31,250
©Cambridge Business Publishers, 2023 10-17
9/30/22 Interest expense 93,750 Interest payable 31,250 Bonds payable 250,000 Cash To record bond interest and principal paid; $93,750 = $5,000,000 x 2.5% x 9/12. 12/31/22 Interest expense Interest payable To accrue interest on bonds; $29,688 = $4,750,000 x 2.5% x 3/12.
29,688 29,688
9/30/23 Interest expense 89,062 Interest payable 29,688 Bonds payable 250,000 Cash To record bond interest and principal paid; $89,062 = $4,750,000 x 2.5% x 9/12. 12/31/23 Interest expense Interest payable To accrue interest on bonds; $28,125 = $4,500,000 x 2.5% x 3/12. Equipment 1/1/21 Equipment Cash To record purchase of equipment.
28,125 28,125
200,000
50,000 50,000
50,000 50,000
6/30/23 Depreciation expense 25,000 Accumulated depreciation To record depreciation on the equipment; $25,000 = $200,000/4 x 1/2.
©Cambridge Business Publishers, 2023 10-3
368,750
200,000
12/31/21 Depreciation expense Accumulated depreciation To record depreciation on the equipment; $50,000 = $200,000/4. 12/31/22 Depreciation expense Accumulated depreciation To record depreciation on the equipment.
375,000
25,000
Advanced Accounting, 5th Edition
Cash Accumulated depreciation Equipment Gain on sale of equipment To record sale of equipment.
90,000 125,000 200,000 15,000
c. 12/31/2022 Balance sheet presentation: 1. Under modified accrual accounting, neither the equipment nor the interest and bonds payable appear on the County’s 12/31/22 balance sheet. 2. Under full accrual accounting, the equipment and bonds appear as follows: Assets Equipment, net of accumulated depreciation of $100,000 Liabilities: Interest payable Bonds payable
$
100,000 29,688 4,750,000
2022 operating statement presentation: 1. Under modified accrual accounting, only the bond payments are reported: Expenditures: debt service interest $ 125,000 Expenditures: debt service principal 250,000 2. Under full accrual accounting, both equipment and bonds affect the operating statement Interest expense ($93,750 + $29,688) Depreciation expense
Test Bank, Chapter 10
$ 123,438 50,000
©Cambridge Business Publishers, 2023 10-19
23.
Topic: General fund closing entries LO 3 The year-end pre-closing trial balance for the general fund of Lassen County appears below:
Cash Property taxes receivable, net Accounts payable Fund balance—unassigned Estimated revenues Estimated other financing sources Appropriations Estimated other financing uses Revenues General expenditures Capital outlay Debt service: Principal payments Debt service: Interest payments General obligation debt proceeds Transfers out Transfers in Totals
$
Debit 25,000 120,000
Credit
30,000 80,000 1,500,000 200,000 1,600,000 100,000 1,510,000 1,495,000 50,000 10,000 25,000 203,000 100,000 ________ $ 3,525,000
2,000 $ 3,525,000
Required Prepare the closing entries for the general fund. ANS: Revenues General obligation debt proceeds Transfers in
1,510,000 203,000 2,000 Estimated revenues Estimated other financing sources Fund balance—unassigned
Appropriations Estimated other financing uses
1,500,000 200,000 15,000 1,600,000 100,000
General expenditures Capital outlay Debt service: Principal payments Debt service: Interest payments Transfers out Fund balance—unassigned
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
1,495,000 50,000 10,000 25,000 100,000 20,000
24.
Topic: Outstanding encumbrances LO 3 Near the end of 2023, Lewis County’s general fund issued purchase orders for merchandise totaling $3,000,000. These purchase orders were still outstanding at year-end. In 2024, the merchandise was delivered, and the county paid the supplier $2,997,000 in cash. The county uses the purchases method to account for merchandise. Encumbrances are reported as assigned fund balance. Required a. Prepare the journal entries necessary to record the above events in 2024, using the legal budgetary basis. Include any beginning-of-year adjusting entries, as well as end-of-year closing entries. b. Repeat the requirements of a., using the GAAP budgetary basis. ANS: a.
No beginning adjusting entry needed. Expenditures—prior
2,997,000
Cash To record delivery of merchandise and payment in cash. Fund balance—assigned
2,997,000
3,000,000 Expenditures—prior Fund balance—unassigned
2,997,000 3,000
To close expenditures. b. Encumbrances
3,000,000
Fund balance—unassigned To record beginning-of-year adjusting entry. Fund balance—assigned
3,000,000
3,000,000 Encumbrances
3,000,000
Expenditures
2,997,000
Cash To record delivery of merchandise and payment in cash. Fund balance—unassigned
2,997,000
2,997,000 Expenditures
2,997,000
To close expenditures.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-21
25.
Topic: General fund encumbrances and inventory accounting LO 3 The City of Jamesville had the following general fund transactions relating to materials and supplies during the year: • • • •
There were outstanding encumbrances at the beginning of the year in the amount of $80,000. These items were received and paid at the encumbered amount during the year. Materials and supplies ordered during the year were received and paid in the amount of $525,000. Outstanding encumbrances at year-end totaled $65,000. Inventory of materials and supplies at year-end was $20,000; inventory of materials and supplies at the beginning of the year was $22,000.
Required Determine the amount of expenditures for materials and supplies that would be reported by Jamesville for the year under each of the following accounting policies: a. b. c. d. ANS: a.
b.
c.
d.
Outstanding Encumbrances Legal budgetary basis Legal budgetary basis GAAP budgetary basis GAAP budgetary basis
Inventory Purchases method Consumption method Purchases method Consumption method
Expenditures for items ordered and purchased during year Outstanding encumbrances, end of year
$525,000 65,000 $590,000
Expenditures for items ordered and purchased during year Outstanding encumbrances, end of year Decrease in inventory
$525,000 65,000 (2,000) $588,000
Expenditures for carryover encumbrances Expenditures for items ordered and purchased during year
$ 80,000 525,000 $605,000
Expenditures for carryover encumbrances Expenditures for items ordered and purchased during year Decrease in inventory
$ 80,000 525,000 (2,000) $603,000
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
26.
Topic: General fund accounting for outstanding encumbrances LO 3 The following information is available for general expenditures in Lake County: • • •
Encumbrances for $5,000,000 in purchase orders are outstanding at the beginning of the year. The orders are delivered during the year and the County pays $5,000,000. Expenditures for the year, ordered, delivered and paid, are $65,000,000. Near the end of the year, encumbrances for $4,500,000 in purchase orders are recorded.
Required a. Prepare the journal entries necessary to record the events of the year, including any beginning-of-year adjustments and end-of-year closing entries, using the legal budgetary basis. b. Prepare the journal entries necessary to record the events of the year, including any beginning-of-year adjustments and end-of-year closing entries, using the GAAP budgetary basis. c. Using the legal budgetary basis, what amount is reported for expenditures for the year? d. Using the GAAP budgetary basis, what amount is reported for expenditures for the year? ANS: a.
Entries during year: Expenditures-prior
5,000,000 Cash
5,000,000
Expenditures
65,000,000 Cash
65,000,000
Encumbrances
4,500,000 Fund balance—assigned
Closing entries: Fund balance—assigned
4,500,000
5,000,000 Expenditures-prior
5,000,000
Fund balance—unassigned
69,500,000 Expenditures Encumbrances
b.
65,000,000 4,500,000
Beginning-of-year adjustment: Encumbrances
5,000,000 Fund balance—unassigned
Entries during year: Fund balance—assigned
5,000,000
5,000,000 Encumbrances
Expenditures
5,000,000 Cash
Test Bank, Chapter 10
5,000,000
5,000,000
©Cambridge Business Publishers, 2023 10-23
Expenditures
65,000,000 Cash
65,000,000
Encumbrances
4,500,000 Fund balance—assigned
4,500,000
Closing entry: Fund balance—unassigned
74,500,000 Expenditures Encumbrances
27.
c.
$65,000,000 + $4,500,000 = $69,500,000
d.
$65,000,000 + $5,000,000 = $70,000,000
70,000,000 4,500,000
Topic: General fund budget and closing entries, outstanding encumbrances LO 3 The pre-closing trial balance of Placer County’s general fund at the end of its fiscal year appears below:
Cash Property taxes receivable, net Due from other funds Estimated revenues Operating expenditures Operating expenditures—prior Capital outlay Debt service: Principal Debt service: Interest Transfers out Encumbrances Accounts payable Due to other funds Appropriations Estimated other financing uses Property tax revenues Fund balance—assigned Fund balance—unassigned
$
Dr 20,000 50,000 7,000 900,000 830,000 4,000 10,000 1,000 4,000 45,000 2,000
Cr
$
_________ $ 1,873,000
35,000 15,000 850,000 45,000 892,000 6,000 30,000 $1,873,000
The county uses the legal budgetary basis to report encumbrances. Required a. Calculate the balance in fund balance—unassigned at the beginning of the year, before the budget entry was made. b. Make the appropriate closing entries at the end of the year. ©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
ANS: a.
The budget entry was: Estimated revenues
900,000 Appropriations Estimated other financing uses Fund balance—unassigned
850,000 45,000 5,000
Fund balance—unassigned before the budget entry is therefore $30,000 - $5,000 = $25,000. b. Property tax revenues Fund balance—unassigned
892,000 8,000 Estimated revenues
Appropriations Estimated other financing uses
900,000 850,000 45,000
Operating expenditures Capital outlay Debt service: Principal Debt service: Interest Transfers out Encumbrances Fund balance—unassigned Fund balance—assigned
4,000 Operating expenditures—prior
Test Bank, Chapter 10
830,000 10,000 1,000 4,000 45,000 2,000 3,000
4,000
©Cambridge Business Publishers, 2023 10-25
28.
Topic: General fund reporting LO 3 The following general fund budget was approved by Plumas County for the current year: Budgeted revenues Budgeted expenditures Budgeted other financing sources Budgeted other financing uses
$4,200,000 3,900,000 200,000 600,000
Plumas County uses the GAAP budgetary basis for outstanding encumbrances. Required During the year, various transactions and events occurred that affected the general fund. For each of the following events, indicate in the space next to each of the names of the listed accounts whether the account should be debited (D), credited (C), or is not affected (N). a.
The adopted budget is recorded. 1. Estimated revenues 2. Estimated other financing sources 3. Encumbrances 4. Estimated other financing uses 5. Appropriations 6. Fund balance—unassigned
b.
Property tax bills for the current year are sent out. It is estimated that 10% are uncollectible. 7. Property tax revenues 8. Property taxes receivable 9. Bad debt expense 10. Allowance for uncollectible taxes 11. Estimated revenues 12. Fund balance—unassigned
c.
Purchase orders for merchandise and equipment are issued. 13. Fund balance-unassigned 14. Fund balance-assigned 15. Encumbrances 16. Expenditures 17. Accounts payable
d.
The general fund moves money to the debt service fund for payment of principal and interest on general obligation debt. 18. Expenditures 19. Revenues 20. Transfers out 21. Transfers in 22. Cash 23. Due from debt service fund
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
e.
Plumas County uses the purchases method for inventories and does not report inventories on its balance sheet. At the end of the year, it determines that it used more inventories than it purchased during the year. 24. Inventory 25. Accounts payable 26. Fund balance—nonspendable 27. Fund balance—unassigned
f.
Closing entries are made at year-end. 28. Encumbrances 29. Fund balance—assigned 30. Due to other funds 31. Taxes receivable 32. Allowance for uncollectible taxes 33. Cash 34. Capital outlay 35. Estimated revenues 36. General expenditures 37. Transfers out 38. Appropriations 39. Revenues 40. Proceeds from bond issues
ANS: a.
The adopted budget is recorded. 1. Estimated revenues 2. Estimated other financing sources 3. Encumbrances 4. Estimated other financing uses 5. Appropriations 6. Fund balance-unassigned
D D N C C D
b.
Property tax bills for the current year are sent out. It is estimated that 10% are uncollectible. 7. Property tax revenues C 8. Property taxes receivable D 9. Bad debt expense N 10. Allowance for uncollectible taxes C 11. Estimated revenues N 12. Fund balance-unassigned N
c.
Purchase orders for merchandise and equipment are issued. 13. Fund balance-unassigned N 14. Fund balance-assigned C 15. Encumbrances D 16. Expenditures N 17. Accounts payable N
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-27
29.
d.
The general fund moves money to the debt service fund for payment of principal and interest on general obligation debt. 18. Expenditures N 19. Revenues N 20. Transfers out D 21. Transfers in N 22. Cash C 23. Due from debt service fund N
e.
Plumas County uses the purchases method for inventories and does not report inventories on its balance sheet. At the end of the year, it determines that it used more inventories than it purchased during the year. 24. Inventory N 25. Accounts payable N 26. Fund balance—nonspendable N 27. Fund balance—unassigned N
f.
Closing entries are made at year-end. 28. Encumbrances 29. Fund balance—assigned 30. Due to other funds 31. Taxes receivable 32. Allowance for uncollectible taxes 33. Cash 34. Capital outlay 35. Estimated revenues 36. General expenditures 37. Transfers out 38. Appropriations 39. Revenues 40. Proceeds from bond issues
C N N N N N C C C C D D D
Transactions, Closing Entries, Budgetary Comparison Schedule, and Balance Sheet LO 3 The April 1, 2023 balance sheet for the general fund of Merced County appears below. MERCED COUNTY General Fund Balance Sheet April 1, 2023 Cash $55,000 Accounts payable Taxes receivable, net of $12,000 allowance for uncollectible taxes 15,000 Fund balance—unassigned Total assets $70,000 Total liabilities and fund balance
$36,000 34,000 $70,000
The county has a March 31 year-end. Outstanding encumbrances are reported in assigned fund balance. Transactions for the town during fiscal 2024 were as follows:
©Cambridge Business Publishers, 2023 10-3
Advanced Accounting, 5th Edition
1.
The town council approved the following budget: estimated revenues of $900,000 in property taxes and $100,000 in fees and service charges, and authorized expenditures of $990,000. The property taxes were accrued. Uncollectible taxes are estimated to be $10,000. Taxes of $16,500 were collected from last year, and $875,000 of this year’s taxes were collected. Uncollected taxes from last year were written off. $18,000 of the remaining uncollected taxes from this year are expected to be collected within 60 days of fiscal year-end. Expenditures were $988,000, and purchase orders of $1,000 were outstanding at fiscal year-end. The accounts payable balance at March 31, 2024 was $27,000. Fees and service charges of $95,000 were collected in cash.
2. 3.
4. 5. 6.
Required a. Prepare the journal entries to record the budget and transactions for fiscal 2024. b. Prepare closing entries for fiscal 2024. c. Compute the unassigned fund balance at March 31, 2024. d. Prepare a budgetary comparison schedule for fiscal 2024. Use the GAAP budgetary basis. e. Prepare the general fund balance sheet at March 31, 2024. ANS:
a. Journal entries: (1) Estimated revenues Appropriations Fund balance—unassigned (2) Taxes receivable Allowance for uncollectible taxes Property tax revenues (3) Cash Allowance for uncollectible taxes Taxes receivable Property tax revenues Cash
1,000,000 990,000 10,000
900,000 10,000 890,000
16,500 12,000 27,000 1,500 875,000
Taxes receivable Allowance for uncollectible taxes Property tax revenues (4) Expenditures Accounts payable Test Bank, Chapter 10
875,000 3,000 3,000
988,000 988,000 ©Cambridge Business Publishers, 2023 10-29
Encumbrances Fund balance—assigned
1,000 1,000
(5) Accounts payable Cash
997,000 997,000
(6) Cash
95,000 Fee and service revenues
95,000
b. Closing entries: Property tax revenues Fee and service revenues Fund balance—unassigned Estimated revenues
894,500 95,000 10,500
Appropriations Fund balance—unassigned Expenditures Encumbrances
990,000
1,000,000
1,000 988,000 1,000
c. $34,500 = $34,000 + $10,000 - $10,500 + $1,000 d. Budgetary Comparison Schedule For the Year Ended March 31, 2024
Revenues Expenditures Change in fund balances (1)
Budget $1,000,000 990,000 $ 10,000
(1) Closing entries $(10,500) + 1,000 = Increase in assigned fund balance Change in fund balances
$(9,500) 1,000 $(8,500)
©Cambridge Business Publishers, 2023 10-3
Actual $989,500 988,000 $ 1,500
Variance— Favorable (Unfavorable) $ (10,500) 2,000 $ (8,500)
Advanced Accounting, 5th Edition
e.
Cash Taxes receivable, net of $7,000 allowance for uncollectible taxes Total assets 30.
MERCED COUNTY General Fund Balance Sheet March 31, 2024 $44,500 Accounts payable
$27,000
18,000 Fund balance—assigned _____ Fund balance—unassigned $62,500 Total liabilities and fund balances
1,000 34,500 $62,500
Topic: General fund budget entry, financial statements LO 3 The June 30, 2024 pre-closing trial balance for the general fund of Yuba County is shown below:
Cash Property taxes receivable Allowance for uncollectible taxes Due from other funds Accounts payable Due to other funds Fund balance—unassigned Estimated revenues Estimated other financing sources Appropriations Estimated other financing uses Property and sales tax revenues Investment income Current operating expenditures Debt service: Principal and interest payments Capital outlay Transfers out Transfers in Proceeds from sale of capital assets Proceeds of general obligation debt Totals
$
Debit 27,000 40,000
Credit
$
24,000
5,000 12,000 4,000 30,000 450,000 30,000 475,000 11,000 440,000 2,000 400,000 50,000 18,000 10,000
________ $1,030,000
3,000 4,000 25,000 $1,030,000
Required a. Prepare the beginning-of-year budget entry, in journal form. b. Prepare the fiscal 2024 statement of revenues, expenditures, and changes in fund balance for the general fund, in good form. c. Prepare the June 30, 2024 balance sheet for the general fund, in good form.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-31
ANS: a. Estimated revenues Estimated other financing sources Fund balance—unassigned
450,000 30,000 6,000 Appropriations Estimated other financing uses
b.
c.
Revenues: Property and sales tax revenues Investment income Total revenues
$440,000 2,000 442,000
Expenditures: Current operating expenditures Debt service: Principal and interest Capital outlay Total expenditures Excess of revenues over (under) expenditures
400,000 50,000 18,000 468,000 (26,000)
Other financing sources (uses): Transfers out Transfers in Proceeds from sale of capital assets Proceeds of general obligation debt Total other financing sources (uses)
(10,000) 3,000 4,000 25,000 22,000
Excess of revenues and other financing sources over (under) expenditures and other financing uses Beginning fund balance (1) Ending fund balance (1) $30,000 + $6,000 = $36,000
(4,000) 36,000 $32,000
Assets Cash Property taxes receivable, net of $24,000 allowance Due from other funds Total assets
$ 27,000 16,000 5,000 $ 48,000
Liabilities and fund balance Accounts payable Due to other funds Fund balance—unassigned (1) Total liabilities and fund balance
$ 12,000 4,000 32,000 $ 48,000
©Cambridge Business Publishers, 2023 10-3
475,000 11,000
Advanced Accounting, 5th Edition
31.
Topic: General fund budget entry, financial statements LO 3 The year-end pre-closing trial balance for the general fund of Chemung County appears below.
Cash and cash equivalents Taxes receivable, net Due from other funds State and federal aid receivable Estimated revenues Estimated other financing sources Accounts payable Due to other funds and governments Fund balance—unassigned Appropriations Estimated other financing uses Property tax revenues Licenses, permits, and fines revenue State and federal aid revenue Proceeds from sale of capital assets Transfers in Bond proceeds General government expenditures Education and public safety expenditures Health and economic assistance expenditures Debt principal expenditures Debt interest expenditures Capital outlay Transfers out Total
Debit $ 11,900 13,400 11,300 13,800 155,000 9,500
Credit
$ 10,100 25,200 4,500 160,000 6,000 98,900 14,500 44,200 1,200 200 8,000 53,800 18,000 73,000 3,500 1,100 3,300 5,200 $ 372,800
_______ $ 372,800
Required a. Prepare the budget entry made at the beginning of the year, and calculate the beginning balance for fund balance—unassigned, before the budget entry. b. Prepare the general fund’s statement of revenues, expenditures, and changes in fund balance for the year, in good form. c. Prepare the general fund’s balance sheet at year-end, in good form. ANS: a. Estimated revenues Estimated other financing sources Fund balance—unassigned
155,000 9,500 1,500 Appropriations Estimated other financing uses
160,000 6,000
Unassigned fund balance before budget entry = $4,500 + $1,500 = $6,000
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-33
b. CHEMUNG COUNTY General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Revenues: Property tax revenues License, permit, and fine revenue State and federal aid revenue Total revenues
$ 98,900 14,500 44,200 $ 157,600
Expenditures: General government expenditures Education and public safety expenditures Health and economic assistance expenditures Debt principal expenditures Debt interest expenditures Capital outlay Total expenditures Excess of revenues over (under) expenditures
53,800 18,000 73,000 3,500 1,100 3,300 152,700 4,900
Other financing sources (uses): Proceeds from sale of capital assets Transfers in Bond proceeds Transfers out Total other financing sources (uses) Excess of revenues and OFS over (under) expenditures and OFU Beginning fund balance—unassigned Ending fund balance—unassigned
1,200 200 8,000 (5,200) 4,200 9,100 6,000 $ 15,100
c.
Assets Cash and cash equivalents Taxes receivable, net Due from other funds State and federal aid receivable Total assets
©Cambridge Business Publishers, 2023 10-3
CHEMUNG COUNTY General Fund Balance Sheet At End of Year Liabilities and fund balance $ 11,900 Accounts payable Due to other funds and 13,400 governments 11,300 Total liabilities 13,800 Fund balance—unassigned $ 50,400 Total liabilities and fund balance
$ 10,100 25,200 35,300 15,100 $ 50,400
Advanced Accounting, 5th Edition
32.
Topic: General fund transactions and financial statements LO 3 The trial balance for Oneida County at the beginning of the year appears below: Account Cash Property taxes receivable Accounts payable Allowance for uncollectible taxes Fund balance—unassigned Total
Dr (Cr) $ 150,000 220,000 (195,000) (90,000) (85,000) $ 0
Events for the year are as follows: 1. 2.
3.
4. 5. 6.
Cash collected from property owners for last year’s taxes is $140,000. The remaining uncollected taxes were written off. Property tax bills were sent out at the beginning of the year in the amount of $8,200,000. Cash collected from property owners for current year taxes was $7,950,000. Of the $250,000 uncollected at year-end, $150,000 in taxes are expected to be collected in the next 60 days. The remainder are considered uncollectible. The county has a very effective speed trap that keeps property taxes low. County police hide behind a large tree and catch motorists as they go down a steep hill on Main Street, which has a posted speed limit of 15 mph. Fines collected on speeding tickets remain with the county, and total $1,000,000 in cash for the current year. Operating expenditures for the year are $9,000,000. Cash paid for operating expenditures totals $9,100,000. Equipment of $120,000 is purchased for cash, and equipment is sold for $305,000 in cash. $300,000 is transferred to the debt service fund for payment of principal and interest on general obligation debt.
Required Prepare the statement of revenues, expenditures, and changes in fund balance for the year, and the balance sheet as of year-end, for Oneida County’s general fund. Include a separate schedule calculating property tax revenue for the year.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-35
ANS: ONEIDA COUNTY General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance for the Year Revenues: Property tax revenues (1) Fines Total revenues Expenditures: Operating expenditures Capital outlay Total expenditures Excess of revenues over (under) expenditures Other financing sources (uses): Proceeds from sale of capital assets Transfers out Total other financing sources (uses) Total excess of expenditures and other financing uses over revenues and other financing sources Beginning fund balance Ending fund balance (1)
$ 8,110,000 1,000,000
Collections of property taxes for last year in excess of amounts accrued Cash collections of current year taxes Accrued property taxes expected to be collected within 60 days Total property tax revenue
$ 9,110,000 9,000,000 120,000 (9,120,000) (10,000) 305,000 (300,000) 5,000
$ $
(5,000) 85,000 80,000
10,000
7,950,000 150,000 $8,110,000
ONEIDA COUNTY General Fund Balance Sheet at Year End Assets Cash Property taxes receivable, net of $100,000 in uncollectible taxes Total assets
©Cambridge Business Publishers, 2023 10-3
$ 25,000
Liabilities and fund balance Accounts payable
$ 95,000
150,000 $ 175,000
Fund balance—unassigned Total liabilities and fund balance
80,000 $ 175,000
Advanced Accounting, 5th Edition
33.
Topic: General fund adjusting and closing entries, financial statements LO 3 The year-end trial balance of the Kings County general fund, before adjusting and closing entries, is as follows:
Cash Taxes receivable Estimated revenues Estimated other financing sources Expenditures Due from other funds Allowance for uncollectible taxes Accounts payable Due to other funds Property tax revenues Transfers from other funds Appropriations Fund balance—unassigned Totals
Debits $ 50,000 150,000 540,000 95,000 630,000 25,000
Credits
$
________ $1,490,000
25,000 40,000 20,000 550,000 100,000 632,000 123,000 $1,490,000
Required a. What was balance in fund balance–unassigned at the beginning of the year, before the budget entry was made? b. Of the uncollected taxes at year-end, 80% are considered to be collectible within 60 days, and the remainder are uncollectible. Make the necessary adjusting entry. c. Prepare the necessary closing entries at year-end. d. Prepare the operating statement for the general fund for the year, in good form. e. Prepare the year-end balance sheet for the general fund, in good form. ANS: a.
The budget entry increased fund balance-unassigned by $3,000 (= estimated revenues $540,000 + estimated other financing sources $95,000 – appropriations $632,000). Therefore the balance before the budget entry was $123,000 - $3,000 = $120,000.
b. Property tax revenues
5,000
Allowance for uncollectible taxes 5,000 To increase the allowance to 20% of unpaid taxes. $5,000 = (20% x $150,000) – $25,000. c. Property tax revenues Transfers from other funds
545,000 100,000 Estimated revenues Estimated other financing sources Fund balance—unassigned
Test Bank, Chapter 10
540,000 95,000 10,000
©Cambridge Business Publishers, 2023 10-37
Appropriations
632,000 Expenditures Fund balance—unassigned
d.
e.
Property tax revenues Expenditures Excess of expenditures over revenues Other financing sources : Transfers in Excess of revenues and other financing sources over expenditures Fund balance, beginning Fund balance, ending Cash Taxes receivable, net Due from other funds
©Cambridge Business Publishers, 2023 10-3
$ 50,000 120,000 25,000 $195,000
Accounts payable Due to other funds Fund balance—unassigned
630,000 2,000 $ 545,000 (630,000) (85,000) 100,000 15,000 120,000 $ 135,000 $ 40,000 20,000 135,000 $195,000
Advanced Accounting, 5th Edition
34.
Topic: General fund adjusting and closing entries, financial statements LO 3 The year-end trial balance for the general fund of Pasco County, before adjustments and closing entries, appears below. The general fund uses the purchases method for inventories and does not report inventories on its balance sheet. The GAAP basis is used for encumbrances, and outstanding encumbrances are reported in assigned fund balance. Beginning encumbrances were $12,000.
Cash Property taxes receivable Estimated revenues Capital outlay Encumbrances General government expenditures Debt service: principal Debt service: interest Due from other funds Estimated other financing sources Allowance for uncollectible property taxes Accounts payable Due to other funds Property tax revenues Sales tax revenues Transfers from other funds Proceeds from sale of property Appropriations Fund balance—assigned Fund balance—unassigned Totals
Debits $ 100,000 300,000 2,600,000 195,000 20,000 2,000,000 180,000 100,000 140,000 380,000
Credits
$
_________ $ 6,015,000
130,000 90,000 25,000 900,000 1,750,000 200,000 150,000 2,500,000 20,000 250,000 $ 6,015,000
Required a. The property taxes receivable balance represents uncollected tax bills from the current year. The county estimates that 30% will be collected within 60 days, 10% will be collected within 120 days, and the rest are uncollectible. Make the necessary adjusting entry to reflect this information. b. Prepare the closing entries at year-end. c. Prepare the statement of revenues, expenditures and changes in fund balances for the general fund, for the year. d. Prepare the balance sheet for the general fund as of year-end.
Test Bank, Chapter 10
©Cambridge Business Publishers, 2023 10-39
ANS: a. Property tax revenues
80,000 Allowance for uncollectible property taxes 50,000 Deferred inflows 30,000 $300,000 x 60% = $180,000 vs $130,000 current balance; allowance increases $50,000. $300,000 x 10% = $30,000 deferred inflows b. Property tax revenues Sales tax revenues Transfers from other funds Proceeds from sale of property Fund balance—unassigned
820,000 1,750,000 200,000 150,000 60,000 Estimated revenues Estimated other financing sources
Appropriations
380,000 2,500,000
Capital outlay Encumbrances General government expenditures Debt service: Principal Debt service: Interest Fund balance—unassigned
©Cambridge Business Publishers, 2023 10-3
2,600,000
195,000 20,000 2,000,000 180,000 100,000 5,000
Advanced Accounting, 5th Edition
c. PASCO COUNTY General Fund Statement of Revenues, Expenditures, and Changes in Fund Balances For the Year Revenues: Property tax revenues Sales tax revenues
$ 820,000 1,750,000
Expenditures: General government expenditures Debt service: principal Debt service: interest Capital outlay Excess of revenues over expenditures Other financing sources: Transfers from other funds Proceeds from sale of property Change in fund balances Beginning fund balances (1) Ending fund balances (2) (1)
(2)
$ 2,570,000
2,000,000 180,000 100,000 195,000
(2,475,000) 95,000
200,000 150,000
$
350,000 445,000 (230,000) 215,000
The budget entry added $480,000 (= $2,600,000 + $380,000 - $2,500,000) to fund balance—unassigned. A beginning entry restored $12,000 to fund balance—unassigned for beginning outstanding encumbrances. Therefore, fund balance—unassigned before these two entries was $(242,000). Fund balance—assigned totaled $12,000, the beginning outstanding encumbrances. $(242,000) + $12,000 = $(230,000) $215,000 = $20,000 + $195,000 (see balance sheet in answer to Part d).
d. PASCO COUNTY General Fund Balance Sheet at Year-End Assets Liabilities Cash $ 100,000 Accounts payable Property taxes receivable, net 120,000 Due to other funds Due from other funds 140,000 Total liabilities
________ Total assets (3)
Test Bank, Chapter 10
$ 360,000
Deferred inflows-taxes Fund balances Assigned Unassigned (3) Total fund balances Total liabilities, deferred inflows, and fund balances
$ 90,000 25,000 115,000 30,000 20,000 195,000 215,000 $ 360,000
$195,000 = $250,000 - $60,000 + $5,000
©Cambridge Business Publishers, 2023 10-41
TEST BANK CHAPTER 11 State and Local Governments: Other Transactions MULTIPLE CHOICE 1.
2.
3.
4.
Topic: Fund balance categories LO 1 What is the only governmental fund that can report a positive unassigned fund balance? a. b. c. d.
Special revenue fund Permanent fund Capital projects fund General fund
ANS:
d
Topic: Fund balance categories LO 1 Which types of funds report the five categories of fund balance? a. b. c. d.
Governmental and proprietary funds Proprietary and fiduciary funds Fiduciary funds only Governmental funds only
ANS:
d
Topic: Fund balance categories LO 1 A special revenue fund reports an unassigned fund balance if a. b. c. d.
the sum of the other fund balance categories exceeds total fund balance. the sum of the other fund balance categories exceeds total fund assets. the sum of the other fund balance categories exceeds total fund liabilities. the sum of the other fund balance categories is less than total fund balance.
ANS:
a
Topic: Fund balance categories, special revenue fund LO 1 A state’s special revenue resources that are limited based on requirements set by the highest level of state authority are reported in which category of the special revenue fund’s fund balance? a. b. c. d.
Committed Restricted Assigned Nonspendable
ANS:
a
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-1
5.
6.
7.
Topic: Fund balance categories, special revenue fund LO 1 A special revenue fund reports total assets of $400,000 and total liabilities of $385,000. It reports these fund balance categories: Nonspendable, $10,000, and restricted, $12,000. What other fund balance category is reported? a. b. c. d.
Committed, $(7,000) Assigned, $7,000 Unassigned, $(7,000) Restricted fund balance is reported at $5,000.
ANS:
c
Topic: Fund balance categories, special revenue fund LO 1 A county special revenue fund for special needs children is financed in its entirety by taxes set aside by the county budget for this purpose. The fund balance of the special revenue fund will be classified as: a. b. c. d.
Assigned Nonspendable Restricted Committed
ANS:
d
Topic: Fund balance categories, special revenue fund LO 1 A county has a Mental Health and Intellectual and Developmental Disabilities special revenue fund that accounts for services provided to county residents. Resources are provided by federal and state grants. The fund reports what category(ies) of fund balance? a. b. c. d.
Restricted Restricted and committed Nonspendable and committed Assigned
ANS:
a
©Cambridge Business Publishers, 2023 11-2
Advanced Accounting, 5th Edition
8.
Topic: Fund balance categories, special revenue fund LO 1 A state reports a transportation special revenue fund whose resources come from federal grants, contributions from private foundations, and taxes set aside by the state budget. Its year-end balance sheet reports total assets of $8,500,000, consisting of $6,500,000 in cash and $2,000,000 in receivables, and total liabilities of $1,500,000. Unspent taxes are $100,000, unspent federal grants are $5,000,000, and unspent contributions from private foundations are $1,900,000. The fund’s balance sheet reports fund balances as follows: a.
9.
10.
b. c. d.
Nonspendable, $6,500,000; Restricted, $6,900,000; Committed $100,000, unassigned $(6,500,000). Restricted, $6,900,000; Committed, $100,000. Restricted, $5,100,000; Committed, $1,900,000. Restricted, $5,000,000; Committed, $1,900,000, Assigned, $100,000.
ANS:
b
Topic: Fund balance categories, special revenue fund LO 1 A state reports an environmental resources special revenue fund whose funding comes from federal grants, contributions from private foundations, and taxes set aside by the state budget. Its year-end balance sheet reports total assets of $10,500,000, consisting of cash and short-term investments, and total liabilities of $1,500,000. Unspent taxes are $200,000, unspent federal grants are $8,850,000, and unspent contributions from private foundations are $100,000. The fund’s balance sheet reports fund balances as follows: a. b. c. d.
Nonspendable, $2,000,000; Restricted, $9,150,000; Committed $50,000. Restricted, $8,950,000; Committed, $200,000; Unassigned, $(150,000). Restricted, $8,850,000; Committed, $300,000; Unassigned, $(150,000). Restricted, $9,000,000.
ANS:
b
Topic: Fund balance categories, special revenue fund LO 1 A county’s special revenue fund reports total fund balances of $2,000,000 from resources restricted for fire protection services in unincorporated areas. The resources come from state grants and from allocations of general property taxes. The fund’s assets consist of cash, receivables, prepaid expenses and inventories. The fund balance is most likely divided into which categories? a. b. c. d.
Restricted only Committed and assigned Nonspendable, restricted, and committed Nonspendable and committed
ANS:
c
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-3
11.
12.
13.
14.
Topic: Fund balance categories, special revenue fund LO 1 A city has a special revenue fund that reports cash of $120,000, inventories of $45,000, and accounts payable of $35,000. The resources for the fund are provided by a county grant. How is fund balance reported for the special revenue fund? a. b. c. d.
Committed, $130,000 Nonspendable, $45,000; committed $85,000 Nonspendable, $45,000; restricted, $85,000 Restricted, $130,000
ANS:
c Inventories are reported as nonspendable fund balance. The county grant is authorized by an external government, so the remaining fund balance is restricted.
Topic: Fund balance categories, permanent fund LO 1 A permanent fund reports endowment investments of $10 million, where donors specify that investment income be used for specific activities. On its balance sheet, the permanent fund reports the investments as assets, and also reports $10 million in which category of fund balance? a. b. c. d.
Nonspendable Restricted Committed Assigned
ANS:
a
Topic: Fund balance categories, permanent fund LO 1 A permanent fund reports endowment investments of $10 million, where donors specify that investment income be used for specific activities. Total unspent income on these investments at year-end is $45,000. On its balance sheet, the permanent fund reports the $45,000 in which category of fund balance? a. b. c. d.
Nonspendable Restricted Committed Assigned
ANS:
b
Topic: Fund balance categories, permanent fund LO 1 A permanent fund will most likely report which of the following classifications of fund balance? a. b. c. d.
Committed and restricted Nonspendable and restricted Committed and assigned Nonspendable and committed
©Cambridge Business Publishers, 2023 11-4
Advanced Accounting, 5th Edition
ANS: 15.
16.
17.
b
Topic: Fund balance categories, permanent fund LO 1 During the current year, a county receives a $6,000,000 endowment from a private citizen for community programs and reports it in a permanent fund. During the year, the county invests the $6,000,000, earning $65,000 in investment income. It spends $55,000 for approved programs. At the end of the year, how is fund balance for this permanent fund reported? a. b. c. d.
Fund balance—restricted, $6,010,000 Fund balance—committed, $6,010,000 Fund balance—nonspendable, $6,000,000, and fund balance—restricted, $10,000 Fund balance—nonspendable, $6,000,000, and fund balance—committed, $10,000
ANS:
c The endowment cannot be spent, so it appears as nonspendable fund balance. At yearend, there are $10,000 (= $65,000 – $55,000) in resources available for expenditure, restricted by an external authority.
Topic: Permanent fund LO 1 The State of Alaska collects mineral-related revenues from businesses operating in the state. The revenues are invested and the income is distributed each year to qualified Alaskan citizens. The State of Alaska accounts for these transactions in: a. b. c. d.
A private purpose trust fund A special revenue fund A permanent fund An enterprise fund
ANS:
c
Topic: Special revenue fund accounting LO 1 A county acquires equipment for $10,000,000 for use for a community project, reported in a special revenue fund. The equipment has a 5-year life, no residual value. After 3 years, the equipment is sold for $1,000,000. Straight-line depreciation is used if appropriate. How is the sale reported in the special revenue fund? a. b. c. d.
Loss on sale, $3,000,000 Revenue, $1,000,000 Expenditure, $3,000,000 Other financing source, $1,000,000
ANS:
d
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-5
18.
19.
20.
Topic: Special revenue fund accounting LO 1 At the beginning of the year, a special revenue fund purchases equipment for $500,000 in cash. The equipment has a 5-year life, straight-line. The fund still holds the equipment at year-end. How is this equipment reported in the special revenue fund’s operating statement for the year? a. b. c. d.
Expense, $100,000. Expenditure, $500,000. Other financing use, $500,000. Not reported on the operating statement.
ANS:
b
Topic: Special revenue fund accounting LO 1 A special revenue fund used to account for flood control activities has these transactions: Payroll, $4,000,000, of which $3,900,000 is paid in cash; equipment purchases, $1,000,000; maintenance costs, $2,000,000; transfers to the general fund, $200,000. On the fund’s operating statement, total expenditures are a. b. c. d.
$7,000,000. $6,100,000 $7,200,000. $6,000,000.
ANS:
a $4,000,000 + $1,000,000 + $2,000,000 = $7,000,000.
Topic: Permanent fund accounting LO 1 A county has a permanent fund, used to account for disaster relief activities. These activities are funded by recreational fees legally held in trust, with income from investment of these fees required to be used for disaster relief. This arrangement is specified by the state legislature. The fund has these transactions for the current year: fee revenues, $600,000, used to purchase financial investments; investment income, $1,000,000; total disbursements, $980,000, consisting of payroll, $800,000, and equipment, $180,000. Nonspendable fund balance increases by what amount for the year? a. b. c. d.
$ 620,000 $ 600,000 $1,000,000 $ 780,000
ANS:
b Increase in nonspendable investments is $600,000. All other activities affect restricted fund balance.
©Cambridge Business Publishers, 2023 11-6
Advanced Accounting, 5th Edition
21.
22.
23.
24.
Topic: Arbitrage rebate LO 2 Governments are required to return arbitrage profits to the federal government. What are arbitrage profits? a. b. c. d.
Amounts charged in excess of costs incurred for public services Bond proceeds invested at a rate of return exceeding the bond interest rate Returns on investments of tax dollars, in excess of the prime rate Bond proceeds used to finance projects not approved in the legal budget
ANS:
b
Topic: Capital projects fund LO 2 At the beginning of the year, a capital projects fund purchases $6 million in equipment for cash. The equipment has a 5-year life, straight-line. A year-end, this purchase reduces the capital projects fund’s fund balance by a. b. c. d.
$4.8 million. $1.2 million. $6 million. No effect.
ANS:
c
Topic: Capital projects fund LO 2 Which one of these capital projects fund accounts is not closed at year-end? a. b. c. d.
Construction expenditures Proceeds from sale of capital assets Capital outlay Deferred inflows: unavailable revenue
ANS:
d
Topic: Capital projects fund LO 2 A state issues bonds, and the money received is to be used for construction of roads. The cash received from the bond issue is recorded as: a. b. c. d.
A liability, in the debt service fund An other financing source, in the debt service fund An other financing source, in the capital projects fund A liability, in the capital projects fund
ANS:
c
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-7
25.
26.
27.
28.
Topic: Capital projects fund LO 2 A county remits property tax collections from the general fund to the capital projects fund, as legally required by its budget, for use in construction projects. The capital projects fund records the cash received as a. b. c. d.
A liability. An other financing source. An investment. A direct increase in committed fund balance.
ANS:
b
Topic: Capital projects fund LO 2 Which account will you never see on the balance sheet of a capital projects fund? a. b. c. d.
Due from other funds Inventory Fund balance—nonspendable Net position invested in capital assets
ANS:
d
Topic: Capital projects fund LO 2 A county general fund provides temporary funding to its capital projects fund for a construction project. The capital projects fund will pay it back to the general fund within the same fiscal year. How will this transaction be recorded by the general fund and the capital projects fund? a. b. c. d.
General Fund Increase in current receivables Expenditure Other financing use Other financing use
ANS:
a
Capital Projects Fund Increase in current payables Revenue Increase in current payables Other financing source
Topic: Capital projects fund LO 2 A $40 million contract is awarded by a county for construction of a building. Bonds are issued to finance construction, in the amount of $40 million. During the first year, $10 million is paid in cash to contractors for work done. At year-end, the capital projects fund reports the following fund balances: a. b. c. d.
Restricted, $30 million. Restricted, $20 million; Committed, $10 million. Restricted, $40 million. Committed, $30 million.
ANS:
a
©Cambridge Business Publishers, 2023 11-8
Advanced Accounting, 5th Edition
29.
30.
31.
Topic: Capital projects fund LO 2 A $30 million contract is awarded by a county for construction of a building. Bonds are issued to finance construction, in the amount of $30 million. During the first year, contractors bill the county $22 million for work done, and $20 million is paid in cash to contractors. At year-end, the capital projects fund reports the following fund balances: a. b. c. d.
Restricted, $8 million. Restricted, $8 million; Committed, $2 million. Restricted, $10 million. Committed, $10 million.
ANS:
a
Topic: Capital projects fund LO 2 A state government begins a project to build administrative facilities, funded by a bond issue. A capital projects fund is set up to account for the construction activities, and an encumbrance is appropriately recognized in the capital projects fund for the full amount of the construction contracts, which is $10 million. At the end of the first year, only $2 million has been billed by contractors and recorded as expenditures. At the beginning of the second year, what entry is necessary in the capital projects fund to recognize the remaining encumbrances of $8 million? a. b. c. d.
Dr. expenditures, cr. encumbrances Dr. encumbrances, cr. fund balance—committed Dr. encumbrances, cr. fund balance—restricted No entry is made.
ANS:
c
Topic: Capital projects fund LO 2 A county capital projects fund had these receipts: State grant for capital projects, $4 million; investment income, $25,000; motor vehicle fees legally dedicated to capital projects, $1 million; proceeds from issuance of bonds to finance capital projects, $500,000. On the capital projects fund operating statement, what are total revenues and total other financing sources? a. b. c. d.
Revenues $5,000,000 $5,025,000 $4,525,000 $1,000,000
ANS:
b
Test Bank, Chapter 11
Other financing sources $ 525,000 $ 500,000 $1,000,000 $4,525,000
©Cambridge Business Publishers, 2023 11-9
32.
Topic: Capital projects fund LO 2 When a government issues bonds to finance a construction project, it typically a. b. c. d. ANS:
sets the coupon rate of interest at or above the current market rate to attract investors. sets the coupon rate of interest at or above the current market rate to ensure that bond proceeds are at or above budgeted costs of the project. sets the coupon rate of interest below the current market rate to make the bond more affordable to investors. sets the coupon rate of interest below the current market rate to increase the likelihood of other funding. b
Use the following information to answer Questions 33 – 36. Construction activities for a county during the current year are as follows: 1.
A capital projects fund is established for the construction of a recreation center. The total project is estimated to cost $15,000,000, with funding to come from a $9,000,000 general obligation bond issue, a $4,000,000 federal grant, and a $2,000,000 transfer from the general fund, as required by the general fund budget.
2.
The general fund transfers $2,000,000 to the capital projects fund.
3.
$3,500,000 of the federal grant is received in cash.
4.
The bond issue with a par value of $9,000,000 yields $9,002,000. The premium is transferred to the debt service fund, as legally required, to finance payment of bond principal and interest.
5.
A contract for $14,800,000 is awarded to a contractor.
6.
Invoices for $8,000,000 are received for work performed by the contractor. The town has a 5% retainage policy and pays the contractor $7,600,000 in cash.
7.
The county’s spending policy is to use restricted resources first.
The county uses the GAAP budgetary basis for end-of-year encumbrances, and records bond proceeds from bond premiums as amounts due to other funds. 33.
Topic: Capital projects fund LO 2 What is the increase in total fund balances for the capital projects fund for the year? a. b. c. d.
$7,400,000 $7,000,000 $6,500,000 $6,900,000
ANS:
b Fund balance—restricted Fund balance—committed Total
©Cambridge Business Publishers, 2023 11-10
$5,000,000 2,000,000 $7,000,000
Advanced Accounting, 5th Edition
34.
35.
36.
Topic: Capital projects fund LO 2 What is the end-of-year balance in fund balance–restricted for the capital projects fund? a. b. c. d.
$5,000,000 $5,400,000 $6,500,000 $7,000,000
ANS:
a $7,000,000 total fund balances less $2,000,000 committed (transfer from general fund).
Topic: Capital projects fund LO 2 What is the cash balance for the capital projects fund at year-end? a. b. c. d.
$6,902,000 $7,300,000 $6,900,000 $7,400,000
ANS:
c $2,000,000 + $3,500,000 + $9,002,000 – $2,000 – $7,600,000 = $6,900,000
Topic: Capital projects fund LO 2 What is the total for other financing sources for the year, reported on the capital projects fund operating statement? a. b. c. d.
$ 2,000,000 $ 9,000,000 $13,000,000 $11,000,000
ANS:
d Bond proceeds Transfer in Total
$9,000,000 2,000,000 $11,000,000
Notes for Questions 33 – 36: Capital project fund journal entries for the year: Bonds authorized—unissued Estimated revenues—federal grant Estimated other financing sources
9,000,000 4,000,000 2,000,000 Appropriations
Federal grant receivable
4,000,000 Federal grant revenue
Test Bank, Chapter 11
15,000,000
4,000,000 ©Cambridge Business Publishers, 2023 11-11
Cash
2,000,000 Transfer in
2,000,000
Cash
3,500,000 Federal grant receivable
3,500,000
Cash
9,002,000 Bond proceeds Due to debt service fund
9,000,000 2,000
Due to debt service fund
2,000 Cash
2,000
Encumbrances
14,800,000
Fund balance—restricted (entry assumes default is restricted fund balance; adjustment made at end of year) Fund balance—restricted
14,800,000
8,000,000 Encumbrances
8,000,000
Expenditures
8,000,000 Cash Contracts payable—retainage
7,600,000 400,000
Closing entries: Appropriations
15,000,000 Expenditures Encumbrances Fund balance—restricted
8,000,000 6,800,000 200,000
Transfer in Bond proceeds Federal grant revenue
2,000,000 9,000,000 4,000,000 Estimated other financing sources Bonds authorized—unissued Estimated revenues—federal grant
Adjust fund balance to reflect spending policy: Fund balance—restricted Fund balance—committed
©Cambridge Business Publishers, 2023 11-12
2,000,000 9,000,000 4,000,000
2,000,000 2,000,000
Advanced Accounting, 5th Edition
Capital Projects Fund Balance Sheet End of Year Assets Cash Federal grant receivable
$ 6,900,000 500,000
_________ $7,400,000
Total assets
Liabilities and fund balances Contracts payable—retainage
$ 400,000
Fund balances: Restricted Committed Total liabilities and fund balances
5,000,000 2,000,000 $7,400,000
Capital Projects Fund Statement of Revenues, Expenditures, and Changes in Fund Balances For the Year Revenues: Federal grant Expenditures Excess of expenditures over revenues Other financing sources: Transfer in from general fund Bond proceeds Total other financing sources Total change in fund balances Beginning fund balances Ending fund balances 37.
38.
$ 4,000,000 (8,000,000) (4,000,000) 2,000,000 9,000,000 11,000,000 $ 7,000,000 0 $ 7,000,000
Topic: Debt service fund LO 3 A debt service fund for serial bonds obtains its funding through transfers from the general fund. The debt service fund will most likely report which one of the following classifications of fund balance? a. b. c. d.
Assigned Restricted Committed Unassigned
ANS:
c
Topic: Debt service fund LO 3 A debt service fund makes a principal payment on general obligation bonds. This payment is reported on the debt service fund’s: a. b. c. d.
Operating statement as an other financing source Balance sheet as a reduction in liabilities Operating statement as an other financing use Operating statement as an expenditure
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-13
ANS: 39.
40.
41.
d
Topic: Debt service fund LO 3 A debt service fund is used to report payments of principal and interest on bonds used for: a. b. c. d.
Governmental and proprietary activities Proprietary activities Governmental activities Fiduciary activities
ANS:
c
Topic: Debt service fund LO 3 A county builds a road and sewers for the benefit of the property owners who live in a wilderness area within the county. The property owners are liable for payments of principal and interest on the debt used to finance the improvements. Where are debt service activities related to this debt reported? a. b. c. d.
Debt service fund Enterprise fund Private purpose trust fund Custodial fund
ANS:
d
Topic: Debt service fund LO 3 A county includes general obligation debt service in its general fund budget, but makes debt service payments using a debt service fund. During the year, the debt service fund receives $400,000 from the general fund for debt service, and makes principal payments of $50,000 and interest payments of $350,000 on general obligation bonds. How much is reported as expenditures in the general fund and debt service fund operating statements? a. b. c. d. ANS:
General fund $350,000 $400,000 $ 0 $ 0
Debt service fund $ 50,000 $400,000 $400,000 $350,000
c The general fund reports the transfer as other financing uses, and the debt service fund reports all payments as expenditures.
©Cambridge Business Publishers, 2023 11-14
Advanced Accounting, 5th Edition
42.
Topic: Debt service fund LO 3 The pre-closing trial balance of a county’s debt service fund at year-end is provided below: Dr (Cr) $41,010 28,000 150,000 390 (105,000) 25,000 80,000 (150,000) (400) (69,000) $ 0
Cash Investments Required additions Required earnings Appropriations Debt service: principal Debt service: interest Transfers in Investment income Fund balance—committed Total
After the accounts are closed, what is the reported fund balance for the debt service fund? a. b. c. d.
$94,000 $69,010 $68,990 $69,000
ANS:
b $69,000 + ($400 – $390) = $69,010
Use the following information to answer questions 43 – 46 below. The trial balance of a county’s debt service fund at the beginning of the year is provided below:
Cash Investments Fund balance—committed Total
Dr (Cr) $15,000 12,000 (27,000) $ 0
General obligation debt payments for the year are estimated to be $80,000 for interest and $30,000 for principal. The county budget requires that the general fund transfer $100,000 to the debt service fund during the year. Income on investments is budgeted at $900. The debt service fund uses budget accounts. Transactions for the year are as follows: • • • •
Test Bank, Chapter 11
The general fund transfers $100,000 to the debt service fund. The capital projects fund transfers a bond premium on newly issued bonds to the debt service fund, in the amount of $1,000. The debt service fund invests $35,000 in securities and sells investments with a book value of $40,000 for $40,200. Interest income on securities held during the year is $375, received in cash. The fair value of investments held at year-end is $7,000. The debt service fund makes the principal and interest payments as budgeted. ©Cambridge Business Publishers, 2023 11-15
43.
44.
45.
46.
Topic: Debt service fund LO 3 The balance for committed fund balance, immediately after the budget entry, is: a. b. c. d.
$27,000 $17,900 $18,875 $17,000
ANS:
b $27,000 - $9,100 = $17,900
Topic: Debt service fund LO 3 The balance for committed fund balance, reported in the debt service fund’s year-end balance sheet, is: a. b. c. d.
$27,000 $17,575 $18,575 $19,425
ANS:
c
Topic: Debt service fund LO 3 Investments, reported in the debt service fund’s year-end balance sheet, are: a. b. c. d.
$7,000 $7,375 $7,100 $6,800
ANS:
a
Topic: Debt service fund LO 3 On its operating statement for the year, the debt service fund reports other financing sources of: a. b. c. d.
$101,000 $101,375 $101,500 $0
ANS:
a
©Cambridge Business Publishers, 2023 11-16
Advanced Accounting, 5th Edition
Notes for Questions 43 – 46: Debt service fund journal entries for the year: Estimated transfers in Estimated earnings Fund balance—committed Appropriations
100,000 900 9,100 110,000
Cash
101,000 Transfer in from GF Transfer in from CPF
100,000 1,000
Investments
35,000 Cash
35,000
Cash
40,200 Investments Gain on sale of investments
Debt service: Interest Debt service: Principal
40,000 200 80,000 30,000
Cash
110,000
Cash
375 Investment income
375
Closing entries: Appropriations
110,000 Debt service: Interest Debt service: Principal
80,000 30,000
Transfer in from GF Transfer in from CPF Investment income Gain on investments
100,000 1,000 375 200 Estimated transfers in Estimated earnings Fund balance—committed
100,000 900 675
Debt Service Fund Balance Sheet End-of-Year Assets Cash Investments Total assets
Test Bank, Chapter 11
$11,575 7,000 $18,575
Fund balance Committed Total fund balance
$18,575 _____ $18,575
©Cambridge Business Publishers, 2023 11-17
Debt Service Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Revenues: Investment income $ 375 Gain on investments 200 Total revenues 575 Expenditures: Debt service: Interest (80,000) Debt service: Principal (30,000) Total expenditures (110,000) Excess of expenditures over revenues (109,425) Other financing sources: Transfer in from general fund 100,000 Transfer in from capital projects fund 1,000 Total other financing sources 101,000 Change in fund balance (8,425) Beginning fund balance 27,000 Ending fund balance $ 18,575 47.
Topic: Statement of net position, proprietary funds LO 4 On the statement of net position of proprietary funds, how is net investment in capital assets measured? a. b.
48.
c. d.
Cost of capital assets, net of accumulated depreciation Cost of capital assets, net of accumulated depreciation, less outstanding principal of related debt Cost of capital assets less outstanding principal of related debt Cost of capital assets
ANS:
b
Topic: Statement of net position, proprietary funds LO 4 Which of the following will not appear on the statement of net position of an enterprise fund? a. b. c. d.
Proceeds from sale of capital assets Bonds payable Accumulated depreciation Intangible assets
ANS:
a
©Cambridge Business Publishers, 2023 11-18
Advanced Accounting, 5th Edition
49.
50.
51.
52.
Topic: Statement of net position, proprietary funds LO 4 On the proprietary funds statement of net position, how is the net position section categorized? a. b. c. d.
Nonspendable and assigned Net investment in capital assets, restricted, and unrestricted Nonspendable, restricted, committed, assigned, and unassigned Restricted and unrestricted
ANS:
b
Topic: Proprietary funds net position LO 4 A county exercise facility is reported in an enterprise fund. At the beginning of the year, the fund reports net investment in capital assets of $25,000,000. During the year, the fund acquires equipment of $5,000,000, purchases a building for $15,000,000, financed in part by a $4,000,000 bank loan secured by the building, records $6,000,000 in depreciation on its buildings and equipment, and pays $200,000 in interest on capital-related debt. What is the ending balance for net investment in capital assets? a. b. c. d.
$43,000,000 $30,000,000 $30,200,000 $35,000,000
ANS:
d $25,000,000 + $20,000,000 - $6,000,000 - $4,000,000 = $35,000,000.
Topic: Proprietary funds financial statements LO 4 A state lottery is reported in an enterprise fund. Its operating statement is called a: a. b. c. d.
Statement of revenue, expenses, and changes in fund balances Statement of revenue, expenditures, and changes in fund balances Statement of revenue, expenditures, and changes in net position Statement of revenue, expenses, and changes in net position
ANS:
d
Topic: Proprietary funds accounting LO 4 A county acquires equipment for $500,000, for use for a community program, reported in an enterprise fund. The equipment has a 5-year life, no residual value. After 3 years, the equipment is sold for $275,000. Straight-line depreciation is used if appropriate. How is the sale reported in the enterprise fund’s operating statement? a. b. c. d.
Other financing source, $275,000 Revenue, $275,000 Gain on sale, $75,000 Loss on sale, $225,000
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-19
ANS: 53.
54.
55.
56.
c $275,000 – (($500,000/5) x 2) = $75,000 gain
Topic: Proprietary funds accounting LO 4 An enterprise fund purchases equipment for $400,000. The equipment has a 4-year estimated life, straight-line, no residual value. The equipment is sold for $150,000 after 3 years. How does the enterprise fund report the sale? Dr cash for $150,000, and: a. b. c. d.
Cr equipment, net for $400,000, dr loss on sale for $250,000 Cr gain on sale of equipment for $50,000, cr equipment, net for $100,000. Cr revenues for $150,000 Cr proceeds from sale of equipment (other financing source) for $150,000
ANS:
b The book value of the equipment at the date of sale is $400,000 – (($400,000/4) x 3) = $100,000. Gain on sale is $150,000 - $100,000 = $50,000.
Topic: Proprietary funds, statement of cash flows LO 4 A state lottery is reported in an enterprise fund. reconciliation of:
Its statement of cash flows reports a
a. b. c. d.
Capital and noncapital financing activities to investing activities Change in net position to cash from operating activities Operating income to cash from operating activities Change in cash to cash from operating activities
ANS:
c
Topic: Proprietary funds, statement of cash flows LO 4 The statement of cash flows reconciliation schedule for a proprietary fund would never include which adjustment? a. b. c. d.
Add depreciation expense on operating capital assets Add a decrease in accounts payable Add a decrease in accounts receivable Add an increase in compensated employee absences payable
ANS:
b
Topic: Proprietary funds, statement of cash flows LO 4 The investing activities section of a proprietary funds statement of cash flows includes: a. b. c. d.
Cash received from the sale of securities Cash received from the sale of buildings and equipment Cash paid for buildings and equipment Cash paid for operating costs
©Cambridge Business Publishers, 2023 11-20
Advanced Accounting, 5th Edition
ANS: 57.
a
Topic: Statement of cash flows, proprietary funds LO 4 Which statement is false concerning the proprietary funds statement of cash flows? a. b. c. d.
Cash flows from operating activities can be displayed using the direct or indirect method. Transfers from other funds are included in cash flows from noncapital financing activities. Investments in securities are included in cash flows from investing activities. Long-term borrowings to finance operations are included in cash flows from noncapital financing activities.
ANS:
a
Use the following information to answer questions 58 and 59 below. Listed below are post-closing accounts of a state lottery at year-end, as reported in the state’s enterprise fund: Dr (Cr) $ 3,000 10,000 (7,200) (3,500) (16) (1,000) 20 (12)
Current assets Long-term investments Long-term prizes payable Current liabilities Long-term pension liabilities Net position restricted for future prizes Deferred outflows for pensions Deferred inflows for pensions 58.
59.
Topic: Proprietary funds statement of net position LO 4 On the lottery’s year-end statement of net position, total assets are: a. b. c. d.
$12,020 $12,012 $13,000 $13,008
ANS:
c
Topic: Proprietary funds statement of net position LO 4 On the lottery’s year-end statement of net position, the balance for unrestricted net position is: a. b. c. d.
$1,300 $2,292 $1,280 $1,292
ANS:
d
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-21
Notes for Questions 58 and 59: State Lottery Statement of Net Position at year-end Assets: Current assets Noncurrent assets: Long-term investments Total assets Deferred outflows of resources: Pensions
$ 3,000 10,000 13,000 20
Liabilities: Current liabilities Noncurrent liabilities: Long-term prizes payable Pension liabilities Total noncurrent liabilities Total liabilities Deferred inflows of resources: Pensions
3,500 7,200 16 7,216 10,716 12
Net Position: Restricted for future prizes Unrestricted (1) Total net position (1)
60.
1,000 1,292 $ 1,292
$13,000 + 20 – $10,716 – $12 - $1,000 = $1,292
Topic: Proprietary funds statement of cash flows LO 4 Here is the year’s financial information for a county’s internal service fund: Change in net position Operating income Depreciation expense Increase in accounts receivable Decrease in inventories Increase in net pension and OPEB liability Decrease in accounts payable
$ 40,000 65,000 100,000 5,000 2,000 20,000 4,000
In the internal service fund’s statement of cash flows for the year, cash provided by operations is: a. b. c. d.
$153,000 $163,000 $186,000 $178,000
ANS:
d
©Cambridge Business Publishers, 2023 11-22
Advanced Accounting, 5th Edition
Operating income Adjustments to reconcile operating income to cash provided by operations: Depreciation expense Increase in accounts receivable Decrease in inventories Increase in net pension and OPEB liability Decrease in accounts payable Cash provided by operations 61.
62.
$ 65,000
100,000 (5,000) 2,000 20,000 (4,000) $178,000
Topic: Fiduciary funds LO 5 In a state ACFR, which fund reports parents’ contributions to state 529 plans, which encourage the accumulation of resources toward their children’s future college tuition payments? a. b. c. d.
Special revenue fund Private purpose trust fund Permanent fund Investment trust fund
ANS:
b
Topic: Fiduciary funds LO 5 Unclaimed property held by a state is reported in a(n) a. b. c. d.
Internal service fund Private-purpose trust fund Custodial fund Investment trust fund
ANS:
b
Use the following information to answer Questions 63 – 66. A county collects property taxes designated for other governments, and reports these activities in a custodial fund. At the beginning of the current year, it levies $1,350,000 in taxes. During the year it collects $1,340,000 in taxes and remits $1,335,000 to other governments. The liability for payment to other governments is accrued when taxes are collected. 63.
Topic: Custodial fund accounting LO 5 The change in the custodial fund’s receivables balance for the year is a. b. c. d.
$0 $ 5,000 increase $10,000 increase $15,000 increase
ANS:
c $1,350,000 - $1,340,000 = $10,000
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-23
64.
65.
66.
Topic: Custodial fund accounting LO 5 When the custodial fund pays collections to other governments, which account is debited? a. b. c. d.
Net position Fund balance—restricted Liability to other governments Deductions—taxes distributed
ANS:
c
Topic: Custodial fund accounting LO 5 On the custodial fund’s operating statement, the change in net position is: a. b. c. d.
$0 $10,000 increase $ 5,000 increase $15,000 increase
ANS:
b Additions of $1,350,000 – Deductions of $1,340,000 = $10,000
Topic: Custodial fund accounting LO 5 Now assume the obligation for payment to other governments is accrued when the taxes are accrued. What is the change in net position for the year? a. b. c. d.
$0 $10,000 increase $ 5,000 increase $15,000 increase
ANS:
a Additions equal deductions.
Use the following information to answer Questions 67 and 68. During the current year, businesses in a county collect $2,000,000 in sales taxes from customers. These taxes are remitted to the county. Sales taxes are shared between the county, the towns located within the county, and the state, with 60% retained by the county for general use and reported in the general fund, 30% transmitted to the state, and 10% distributed to the towns. The obligation to the state and towns is accrued when the taxes are collected. Taxes collected and disbursed to the state and towns are reported in a custodial fund. By year-end, the county had distributed $580,000 of sales taxes due to the state and $195,000 of sales taxes due to the towns.
©Cambridge Business Publishers, 2023 11-24
Advanced Accounting, 5th Edition
67.
68.
Topic: Custodial fund accounting LO 5 What is the year’s change in net position for the custodial fund? a. b. c. d.
$(25,000) $25,000 $0 $800,000
ANS:
c
Topic: Custodial fund accounting LO 5 On the custodial fund’s statement of net position at year-end, what are total assets? a. b. c. d.
$0 $ 25,000 $825,000 $800,000
ANS:
b
Notes for Questions 67 and 68: Journal entries for the custodial fund: Cash
800,000
Additions To record collection of sales taxes on behalf of the state and towns. Deductions
800,000
800,000
Sales taxes due to state Sales taxes due to towns To record obligation to make payments to the state and towns. Sales taxes due to state Sales taxes due to towns
600,000 200,000
580,000 195,000 Cash
775,000
Custodial Fund Operating statement for the year Additions: sales tax collections Less Deductions: sales taxes remitted to state and towns Change in net position
Test Bank, Chapter 11
$800,000 (800,000) $ 0
©Cambridge Business Publishers, 2023 11-25
Custodial Fund Statement of Net Position End of year Assets Cash Total assets 69.
70.
71.
Liabilities $25,000 Sales taxes due to state _____ Sales taxes due to towns $25,000 Total liabilities
$20,000 5,000 $25,000
Topic: Accounting for investments LO 6 Many governments have extensive investments in debt and equity securities, held for income and not for hedging purposes. Which types of funds must report these investments at fair value and report unrealized gains and losses in their operating statement? a. b. c. d.
Fiduciary only Governmental, proprietary and fiduciary Proprietary only Proprietary and fiduciary
ANS:
b
Topic: Hedge investments LO 6 A state’s enterprise fund enters a receive variable/pay fixed interest rate swap that hedges its variable rate debt. If market interest rates fall during the year, where is the change in the value of the swap investment reported in the proprietary funds balance sheet? a. b. c. d.
As an asset As a reduction in net position As a deferred outflow Not reported
ANS:
c
Topic: Accounting for investments LO 6 A state determines that one of its swaps, reported in its enterprise fund, is no longer effective as a hedge of interest rate risk, and therefore hedge accounting is no longer appropriate. The swap was reported as a liability of $2 million. What is one of the effects of reclassifying the swap on the proprietary funds financial statements? a. b. c. d. ANS:
Investment income increases by $2 million on the proprietary funds operating statement. Investment loss increases by $2 million on the proprietary funds operating statement. The investment is reclassified from the asset to the net position section of the proprietary funds statement of net position. Deferred inflows are reduced by $2 million on the proprietary funds statement of net position. b
©Cambridge Business Publishers, 2023 11-26
Advanced Accounting, 5th Edition
72.
73.
74.
Topic: Accounting for investments LO 6 Local governments often have variable rate debt and hedge the related interest rate risk with an interest rate swap. The swap investments increase in value when: a. b. c. d.
interest rates go down. interest rates go up. the variable rate debt is paid off. the swaps are reported using hedge accounting.
ANS:
b
Topic: Accounting for investments LO 6 On its proprietary funds statement of net position, a state reports deferred outflows of $6 million related to derivatives. Which of the following might explain this amount? a. b. c. d.
The derivative investments are classified as liabilities. The derivatives swap variable rate for fixed rate debt, and interest rates have increased. The derivatives are held as income-earning investments, and their value has increased. The derivatives no longer qualify for hedge accounting.
ANS:
a
Topic: Income investments LO 6 A debt service fund paid $2,000,000 for securities classified as income investments at the beginning of the year. During the year, $30,000 of investment income is received in cash. At yearend, the fund still holds the securities, and their market value has declined to $1,990,000. How is this reported by the debt service fund? a. b. c. d. ANS:
Investments, $2,000,000 on the balance sheet, and investment income of $20,000 on the operating statement. Investments, $1,990,000 and deferred outflows, $10,000 on the balance sheet and investment income of $30,000 on the operating statement. Investments, $1,990,000 on the balance sheet, and investment income of $20,000 on the operating statement. Investments, $2,000,000 on the balance sheet, and investment income of $30,000 on the operating statement. c
Use the following information to answer Questions 75 and 76. On April 1, 2023, an enterprise fund issued $1,000,000 in variable rate debt, with interest paid on March 31 of each year, the fiscal year-end. The rate is reset annually. The variable rate for fiscal 2024 is 2.5%. On the same date, the fund entered a receive variable/pay fixed interest rate swap, where the fund pays a 2.6% fixed rate to a counterparty. By the end of fiscal 2024, the variable rate increased to 2.7% and the swap is valued at $5,000. The swap qualifies for hedge accounting.
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-27
75.
76.
Topic: Derivative investments LO 6 How is the enterprise fund’s investment in derivatives reported on its statement of net position at March 31, 2024? a. b. c. d.
Liability of $5,000. Asset of $5,000. Not reported. Deferred outflow of $5,000.
ANS:
b
Topic: Derivative investments LO 6 At what amount does the enterprise fund report interest expense on its fiscal 2024 operating statement? a. b. c. d.
$34,000 $33,000 $26,000 $25,000
ANS:
c $1,000,000 x 2.6% = $26,000.
Notes for Questions 75 and 76. Journal entries: April 1, 2023 Cash
1,000,000 Bonds payable
1,000,000
March 31, 2024 Interest expense—bonds Interest expense—counterparty
25,000 1,000 Cash
26,000
Investment in derivatives
5,000 Deferred inflow: derivatives
©Cambridge Business Publishers, 2023 11-28
Advanced Accounting, 5th Edition
5,000
77.
Topic: Income investments LO 6 State and local governments often invest liquid assets on a short-term or long-term basis for income and capital gains. Which statement best describes the reporting for these investments, per SGAS 31? a.
Investments are classified as trading or held to maturity. Trading securities are reported at market value, with changes in value reported in the appropriate operating statement. Held to maturity investments are reported at cost. Investments are reported at market value, with changes in value accumulated in a contraasset account, and the net balance is reported at cost. Investments are reported at market value, with changes in value reported in the appropriate operating statement. Investments are reported at cost. Any gain or loss is reported when the investments are liquidated.
b. c. d. ANS: 78.
79.
c
Topic: Derivative investments LO 6 An enterprise fund has variable interest debt and uses an interest rate swap to change its interest payments to a fixed rate. The swap qualifies for hedge accounting. During the current year, the fund pays $15,000 in interest to the swap holder, and receives variable interest of $16,000 to service its debt. The swap increases in value by $5,000. How is this information reported on the enterprise fund’s statement of revenues, expenses, and changes in net position? a. b. c. d.
Interest expense, $15,000; gain on swap $5,000. Interest expense, $16,000; gain on swap $5,000. Interest expense, $15,000. Interest expense, $16,000.
ANS:
d
Topic: Income investments LO 6 A county government has an investment in securities, purchased for $200,000, with a current fair value of $185,000. The investment does not qualify for hedge accounting. How is this investment reported on a governmental funds balance sheet and on a proprietary funds statement of net position? a. b. c. d.
Governmental Funds $200,000 $185,000 $185,000 $200,000
ANS:
Proprietary Funds $200,000 $185,000 $200,000 $185,000
b
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-29
80.
Topic: Compensated absences LO 6 Which statement is true with respect to reporting for compensated absences by state and local governments? a.
d.
Only compensated absences expected to be paid with current financial resources are reported in the proprietary funds operating statement. If the benefit depends on future services provided by the employee, an expense is not reported in the proprietary funds. The compensated absence expense reported in the proprietary funds is generally lower than the compensated absence expenditure reported in the governmental funds. Most sick leave is accrued by governmental funds.
ANS:
b
b. c.
81.
Topic: Compensated absences LO 6 Which statement is false with respect to reporting for compensated absences by state and local governments? a.
d.
Only compensated absences expected to be paid with current financial resources are reported in the governmental funds funds operating statement. If future compensated absences have been accrued in a previous year, when employees take paid vacations the cost reduces a liability. The compensated absence expense reported in the proprietary funds is generally higher than the compensated absence expenditure reported in the governmental funds. Sick leave is usually accrued more often than vacation pay.
ANS:
d
b. c.
82.
Topic: Landfills LO 6 A working landfill is reported in a proprietary fund and is 40% filled at year-end. Total estimated closure and postclosure costs are $20,000,000, and the current balance in the liability for landfill closure and postclosure costs is $6,000,000. The landfill is not expected to be closed for several years. The operating statement of the landfill will report what amount for closure and postclosure expenses for the current year? a. b. c. d.
$-0$20,000,000 $ 2,000,000 $14,000,000
ANS:
c ($20,000,000 x 40%) - $6,000,000 = $2,000,000
©Cambridge Business Publishers, 2023 11-30
Advanced Accounting, 5th Edition
83.
84.
Topic: Landfills LO 6 A working landfill is reported in a governmental fund and is 40% filled at year-end. Total estimated closure and postclosure costs are $20,000,000, and the current balance in the liability for landfill closure and postclosure costs is $6,000,000. The landfill is not expected to be closed for several years. The operating statement of the landfill will report what amount for closure and postclosure expenses for the current year? a. b. c. d.
$-0$20,000,000 $ 2,000,000 $14,000,000
ANS:
a Governmental funds only accrue closure and postclosure costs if they will use current resources.
Topic: Landfills LO 6 Landfill operations may be reported in a governmental fund or in a proprietary fund. Assume an operating landfill is estimated to be 30% filled and is expected to be closed in 10 years. Total expected costs of closure and postclosure care are estimated at $15,000,000. Which statement below is false? a. b. c. d. ANS:
If the landfill is reported in a proprietary fund, the total liability for future closure and postclosure costs is reported at $15,000,000. If the landfill is reported in a proprietary fund, and previously reported closure and postclosure costs are $4,000,000, the current year’s expense for future closure and postclosure costs is reported at $500,000. If the landfill is reported in a governmental fund, the total liability for future closure and postclosure costs is reported at zero. If the landfill is reported in a governmental fund, the current year’s expense for future closure and postclosure costs is reported at zero. a The proprietary fund’s liability for future closure and postclosure costs is 30% x $15,000,000 = $4,500,000.
Use the following information to answer questions 85 and 86 below. At the beginning of the year, a county builds a sewage treatment plant, reported in an enterprise fund. The plant is expected to be in service for 25 years. The county is responsible for the plant’s retirement at the end of its life, following all safety and environmental requirements. The estimated present value of the future retirement costs is $10,000,000, to be recognized on a straight-line basis over the plant’s estimated life.
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-31
85.
86.
Topic: Asset retirement obligations LO 6 The enterprise fund reports asset retirement expense for the current year of: a. b. c. d.
$ 400,000 $10,000,000 $ 9,600,000 $0
ANS:
a $10,000,000/25 = $400,000.
Topic: Asset retirement obligations LO 6 What amount does the enterprise fund report for deferred outflows of resources, related to its asset retirement obligation, in its year-end statement of net position? a. b. c. d.
$10,000,000 $ 9,600,000 $ 400,000 $0
ANS:
b Journal entries for the year are: Deferred outflows of resources—plant retirement costs 10,000,000 Asset retirement obligation To record the retirement obligation at the beginning of the year. Asset retirement expense Deferred outflows of resources—plant retirement costs To record current year’s expense; $400,000 = $10,000,000/25.
10,000,000
400,000 400,000
Use the following information to answer questions 87 – 90 below. At the beginning of the current year, a county government enters a 3-year lease with these terms: $100,000 is due at signing, and payments of $100,000 per year are due at the end of each of the next two years. The lease agreement carries an interest rate of 3.5%. The present value of the total lease payments is $289,969. If appropriate, the leased asset is straight-line depreciated. 87.
Topic: Leases, governmental funds LO 6 Assume the lease is reported in the general fund. At the start of the lease, the general fund: a. b. c. d.
Records $100,000 in other financing sources. Records expenditures of $289,969. Records $289,969 as a long-term asset. Records $300,000 in other financing uses.
ANS:
b
©Cambridge Business Publishers, 2023 11-32
Advanced Accounting, 5th Edition
88.
Topic: Leases, governmental funds LO 6 Assume the lease is reported in the general fund. At the end of the first year, when the second payment is made, the general fund reports lease expenditures of a. b. c. d.
$100,000. $ 10,149. $ 6,649. $0.
ANS:
a
Notes for Questions 87 and 88: The general fund prepares the following entries related to the lease: Beginning of lease: Expenditures—capitalized leases
289,969 Other financing sources
Expenditures—principal
289,969 100,000
Cash End of first year: Expenditures—interest Expenditures—principal
100,000
6,649 93,351 Cash
100,000
$6,649 = 3.5% x ($289,969 - $100,000) 89.
90.
Topic: Leases, proprietary funds LO 6 Assume the lease is reported in an enterprise fund. At the start of the lease, the enterprise fund: a. b. c. d.
Records $100,000 in other financing sources. Records expenses of $289,969. Records $289,969 as a long-term asset. Records $300,000 in other financing uses.
ANS:
c
Topic: Leases, proprietary funds LO 6 Assume the lease is reported in an enterprise fund. At the end of the first year, the enterprise fund reports total lease expenses of a. b. c. d.
$100,000. $106,805. $103,305. $203,305.
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-33
ANS:
c $103,305 = $6,649 + $96,656
Notes for Questions 89 and 90: Beginning of lease: Leased asset
289,969 Lease liability
289,969
Lease liability
100,000 Cash
100,000
End of first year: Interest expense Lease liability
6,649 93,351 Cash
100,000
Depreciation expense
96,656 Leased asset
96,656
$96,656 = $289,969/3 91.
Topic: Debt refundings LO 6 A governmental fund issues 3% bonds for $15,000,000 and uses this money to refund 5% bonds currently carried at $14,900,000. If both transactions are recorded in the same fund, how is this reported by the governmental fund? a. b. c. d. ANS:
Debit expenditures $15,000,000 and credit other financing sources $15,000,000. Debit bonds payable $14,900,000, debit deferred outflows $100,000 and credit bonds payable $15,000,000. Debit other financing uses $14,900,000; debit expenditures $100,000; and credit other financing sources $15,000,000. Debit cash $15,000,000 and credit bonds payable $15,000,000. a The governmental fund makes the following entries: Cash Bond proceeds (other financing sources) To record new bonds issued. Expenditures (bond refunding)
15,000,000 15,000,000
15,000,000 Cash
15,000,000
To record refunding of old bonds.
©Cambridge Business Publishers, 2023 11-34
Advanced Accounting, 5th Edition
92.
Topic: Debt refundings LO 6 A proprietary fund issues 3% bonds for $15,000,000 and uses this money to refund 5% bonds currently carried at $14,900,000. How is this reported by the proprietary fund? a. b. c. d. ANS:
93.
Debit expenditures $15,000,000 and credit other financing sources $15,000,000. Debit bonds payable $14,900,000, debit deferred outflows $100,000 and credit bonds payable $15,000,000. Debit other financing uses $14,900,000; debit expenditures $100,000; and credit other financing sources $15,000,000. Debit cash $15,000,000 and credit bonds payable $15,000,000. b The proprietary fund makes the following net entry: Bonds payable (old) Deferred outflow—refunding Bonds payable (new) To record old bonds refunded and new bonds issued.
14,900,000 100,000 15,000,000
Topic: Debt refundings LO 6 An enterprise fund issues 2.5% debt for $205,000 to refund 4.75% debt with a carrying value of $200,000, callable at $205,000. How is the $5,000 difference between the value of the new debt and the refunded debt reported by the enterprise fund? a. b. c. d.
Other financing use on the operating statement. Expense on the operating statement. Deferred inflow of resources on the statement of net position. Deferred outflow of resources on the statement of net position.
ANS:
d
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-35
PROBLEMS 1.
Topic: Special revenue fund accounting LO 1 A county has a special revenue fund used to report receipt and expenditure of resources legally restricted to disaster relief projects. Resources come from state grants and assessed taxes. Suppose the fund has the following beginning balance sheet:
Cash
Totals
Disaster Relief Fund Balance Sheet Beginning of Year $75,000 Accounts payable Fund balance—restricted _____ Fund balance—committed $75,000 Totals
$30,000 20,000 25,000 $75,000
The budget for the year provides for $100,000 in special assessed taxes, $600,000 in state grants, and $700,000 in expenditures. Actual results for the year were: $98,000 in special assessed taxes, $600,000 in state grants, and $695,000 in expenditures. Accounts payable increased by $1,000. Spending policy is to use state resources first, and $590,000 of expenditures meet state qualifications. Required Prepare the entries to record the fund’s budget and transactions, and the closing entries for the year. Present the fund’s balance sheet at year-end, and its operating statement for the year, in good form. ANS: Estimated revenues Appropriations To record budget. Cash
700,000 700,000
698,000
Tax revenue State grant revenue To record resource inflows. Expenditures Accounts payable Cash To record expenditures.
98,000 600,000
695,000 1,000 694,000
Tax revenue 98,000 State grant revenue 600,000 Appropriations 700,000 Fund balance—committed 7,000 Estimated revenues 700,000 Expenditures 695,000 Fund balance—restricted 10,000 To close revenues and expenditures, and adjust fund balances; $10,000 = $600,000 - $590,000. ©Cambridge Business Publishers, 2023 11-36
Advanced Accounting, 5th Edition
Cash
Totals
Disaster Relief Fund Balance Sheet End of Year $79,000 Accounts payable Fund balance—restricted _____ Fund balance—committed $79,000 Totals
$31,000 30,000 18,000 $79,000
Disaster Relief Fund Statement of Revenues, Expenditures, and Changes in Fund Balances For the Year Tax revenue $ 98,000 State grant revenue 600,000 Total revenues 698,000 Expenditures (695,000) Excess of revenues over expenditures 3,000 Beginning fund balances 45,000 Ending fund balances $ 48,000 2.
Topic: Special revenue fund accounting LO 1 A county has a special revenue fund that accounts for resources used for community projects. Resources for the projects come from a special property tax, federal grants, and investment income. The balance sheet of the fund at the beginning of the year is below.
Cash Investments Receivables Totals
Community Projects Fund Balance Sheet Beginning of Year $140,000 Accounts payable 25,000 Fund balance—restricted 12,000 Fund balance—committed $177,000 Totals
$ 20,000 57,000 100,000 $177,000
The following transactions occurred during the year: 1. Investment income was $450, received in cash, and the fair value of investments increased $1,000. 2. Special assessed property taxes were $800,000, and collections were $805,000. Receivables report uncollected taxes, and no uncollectible taxes are expected. 3. Federal grants of $200,000 were received. Grants are recorded as revenue when received. 4. Cash disbursements for community projects were $365,000 for equipment, $180,000 for supplies, and $550,000 for payroll. Accounts payable decreased by $500. Supplies are reported using the purchases method. 5. Spending policy is to spend federal grants first. Of total disbursements, $210,000 meet federal restrictions.
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-37
Required Present the Community Projects Fund operating statement for the year, and its year-end balance sheet.
Cash Investments Receivables Totals
Community Projects Fund Balance Sheet End of Year $49,950 Accounts payable 26,000 Fund balance—restricted 7,000 Fund balance—committed $82,950 Totals
$19,500 47,000 16,450 $82,950
Community Projects Fund Statement of Revenues, Expenditures, and Changes in Fund Balances For the Year Revenues: Tax revenue $ 800,000 Federal grant revenue 200,000 Investment income 450 Unrealized gains on investments 1,000 Total revenues 1,001,450 Expenditures: Capital outlay 365,000 Supplies 180,000 Payroll 550,000 Total expenditures 1,095,000 Excess of expenditures over revenues (93,550) Beginning fund balances 157,000 Ending fund balances $ 63,450 3.
Topic: Special revenue fund accounting LO 1 At the beginning of the current year, Sebring County established a Flood Control special revenue fund. During the year, the following events occurred: • • • • • •
The general fund transferred $5,000,000 to the Flood Control Fund. A state grant of $3,000,000 was received. Contracts totaling $5,500,000 were signed for flood control work. Contractors submitted bills for $3,200,000. Bills totaling $3,100,000 were paid. Equipment of $1,000,000 was purchased. $300,000 remains unpaid. The fund does not use budgetary accounts. The county’s policy is to spend restricted resources first.
Required a. Prepare all journal entries to record transactions and close accounts for the Flood Control Fund for the year. b. Prepare the operating statement for the year and the year-end balance sheet for the Flood Control Fund. ©Cambridge Business Publishers, 2023 11-38
Advanced Accounting, 5th Edition
ANS: a. Cash
8,000,000
Transfers in State grant revenue To record transfer from general fund and receipt of state grant. Encumbrances
5,000,000 3,000,000
5,500,000 Fund balance—restricted Fund balance—committed
3,000,000 2,500,000
To record award of contract. Fund balance—restricted Fund balance—committed
3,000,000 200,000
Encumbrances To reverse encumbrances for contract.
3,200,000
Expenditures: Contract work
3,200,000
Cash Accounts payable To record billings and payment to contractors. Expenditures: Capital outlay
3,100,000 100,000
1,000,000 Cash Accounts payable
700,000 300,000
To record equipment purchase. State grant revenue Transfers in
3,000,000 5,000,000 Expenditures: Contract work Expenditures: Capital outlay Encumbrances Fund balance—committed
3,200,000 1,000,000 2,300,000 1,500,000
To close accounts. b. Flood Control Fund Statement of Revenues, Expenditures, and Changes in Fund Balances For the Year State grant revenue Expenditures: Contract work Expenditures: Capital outlay Excess of expenditures over revenues Other financing sources: Transfers in Excess of revenues and other financing sources over expenditures Beginning fund balances Ending fund balances
Test Bank, Chapter 11
$ 3,000,000 (3,200,000) (1,000,000) (1,200,000) 5,000,000 3,800,000 0 $ 3,800,000
©Cambridge Business Publishers, 2023 11-39
Flood Control Fund Balance Sheet End of Year Assets Cash
4.
$ 4,200,000 _________ $ 4,200,000
Liabilities and fund balances Accounts payable Fund balance: Committed
$
400,000 3,800,000 $ 4,200,000
Topic: Special revenue fund accounting LO 1 Spencer County has a special revenue fund that accounts for resources to be used for boardwalk construction projects. Resources for the projects come from state grants. The construction activities themselves are reported in a capital projects fund. The balance sheets of the Boardwalk Fund at June 30, 2024, and June 30, 2023, are below. June 30, Cash and investments…………………………………. Grants receivable, net………………………………… Due from capital projects fund...…………………. Total assets………….…………………………………
2024 $26,980,000 2,000,000 1,500,000 $30,480,000
Accounts payable………………………………………… Total liabilities…………………………………………
$
Fund balance Restricted for boardwalk projects………….. Total liabilities and fund balance…………….
2023 $25,000,000 1,900,000 -$26,900,000
45,000 45,000
35,000 35,000
30,435,000 $30,480,000
26,865,000 $26,900,000
The following transactions occurred during fiscal 2024: 1. 2. 3. 4. 5.
Investment income was $150,000, and unrealized gains on investments were $20,000. The state granted $8,000,000 for boardwalk projects. Transfers of $1,200,000 were made to the Waterway Maintenance Fund, which maintains waterways within the County. Transfers of $1,600,000 were received from the capital projects fund for return of excess funds from various boardwalk construction projects. Expenditures were $5,000,000.
Assume the following: • Receivables are accrued state grants. • Amounts due from the capital projects fund are advances on construction projects. • Accounts payable related to accrued expenditures. Required a. Prepare the summary journal entries made in the Boardwalk Fund. b. Present the fiscal 2024 operating statement for the Boardwalk Fund, in good form.
©Cambridge Business Publishers, 2023 11-40
Advanced Accounting, 5th Edition
ANS: a. Cash and investments 170,000 Investment income Unrealized gains on investments To record investment income and increase in fair value of investments. Cash and investments Grants receivable State grant revenue To record state grant revenue.
7,900,000 100,000
Transfers out Cash and investments To record transfers to Waterway Maintenance Fund.
1,200,000
Due from capital projects fund Cash and investments To record advance to capital projects fund.
1,500,000
Expenditures Cash and investments Accounts payable To record expenditures.
5,000,000
Cash and investments Transfers in To record transfers from capital projects fund.
1,600,000
150,000 20,000
8,000,000
1,200,000
1,500,000
4,990,000 10,000
1,600,000
b. Boardwalk Fund Statement of Revenues, Expenditures and Changes in Fund Balance For the Year Ended June 30, 2024 Revenues: State grants Investment income and unrealized gains on investments Total revenues Expenditures Excess of revenues over expenditures Other financing sources (uses): Transfer in from capital projects fund Transfer out to Waterway Maintenance Fund Net other financing sources (uses) Excess of revenues and other financing sources over expenditures and other financing uses Fund balance, July 1, 2023 Fund balance, June 30, 2024 Test Bank, Chapter 11
$8,000,000 170,000 8,170,000 (5,000,000) 3,170,000 1,600,000 (1,200,000) 400,000 3,570,000 26,865,000 $30,435,000
©Cambridge Business Publishers, 2023 11-41
5.
Topic: Permanent fund accounting LO 1 At the start of the current year, a resident of the City of Lewiston donated $4 million to the Lewiston School District. The donor specified that the entire $4 million be invested, and investment income used to provide recreational activities for middle school students. Investments were made, and investment income for the year was $75,000. Administrative costs related to investing activities were $1,000. The school district spent $10,000 for supplies, $14,000 for facilities rent, and $35,000 for staffing of recreational activities. The investments are worth $4,120,000 at the end of the year. Required Record the events described above in a permanent fund. Include closing entries. ANS: Cash—principal Fund balance—nonspendable To record donation.
4,000,000
Investments—principal Cash—principal To record investment of endowment.
4,000,000
Cash—income Investment income To record earnings on investments.
75,000
Expenditures Cash—income To record administrative expenses charged to income.
1,000
Expenditures Cash—income To record expenditures for recreational activities.
59,000
4,000,000
4,000,000
75,000
1,000
59,000
Investments—income 120,000 Unrealized gain on investments 120,000 To record appreciation in investments value; $120,000 = $4,120,000 – $4,000,000 Investment income Unrealized gain on investments Expenditures Fund balance—restricted To close income and expenditures.
©Cambridge Business Publishers, 2023 11-42
75,000 120,000 60,000 135,000
Advanced Accounting, 5th Edition
6.
Topic: Permanent fund accounting LO 1 On December 31, 2023, the City of Lancaster received a gift of $25,000,000 to endow a new public library. Terms of the gift provide that the principal be held intact and invested in appropriate securities. The donor specifies that income is to be used for library acquisitions. The City uses a permanent fund to report this endowment. On January 2, 2024, the gift was invested in securities having an annual yield of 2.5 percent. Library acquisitions costing $500,000 were made during 2024; $20,000 of these acquisitions remains unpaid at year-end, December 31, 2024. The securities have a value of $25,030,000 at year-end. Required a. Prepare appropriate journal entries (including closing entries) for 2024. b. Present the fund financial statements for 2024. ANS: a. Investments—principal
25,000,000 Cash—principal
25,000,000
Cash—income Investments—income
625,000 30,000
Investment income Unrealized gain on investments $25,000,000 x 2.5% = $625,000; $25,030,000 - $25,000,000 = $30,000. Expenditures
625,000 30,000
500,000 Cash—income Accounts payable
480,000 20,000
Investment income Unrealized gain on investments
625,000 30,000 Expenditures Fund balance—restricted
500,000 155,000
b. Permanent Fund Balance Sheet December 31, 2024 Assets Cash-income Investments
Test Bank, Chapter 11
Liabilities and fund balances 145,000 Accounts payable 25,030,000 Fund balances: Nonspendable _________ Restricted $25,175,000
$
$
20,000
25,000,000 155,000 $25,175,000
©Cambridge Business Publishers, 2023 11-43
Permanent Fund Statement of Revenues, Expenditures, and Changes in Fund Balances For the Year 2024 Revenues: Investment income Unrealized gain on investments Total revenues Less: Expenditures Excess of revenues and unrealized gains over expenditures Beginning fund balances Ending fund balances 7.
$
625,000 30,000 655,000 (500,000) 155,000 25,000,000 $25,155,000
Topic: Capital projects fund accounting LO 2
A city has an Improvements Fund, a capital projects fund which accounts for expenditures for land, buildings, major renovations, and park improvements. Its fund balances are divided between restricted fund balance, reporting constraints imposed on the use of resources by external parties, such as grantors or laws of other governments, and assigned fund balance, reporting amounts intended to be used for specific purposes but not committed by the City Council. Its beginningof-year balance sheet is below. Improvements Fund Balance sheet Beginning of Year Assets Cash and investments…………………………………………………………… $65,000 Due from other funds……………………………………………………………. 5,000 Total assets………………………………………………………………………. $70,000 Liabilities and fund balances Liabilities Accounts payable…………………………………………………………………… $20,000 Accrued salaries and wages……………………………………………………. 14,500 Total liabilities……………………………………………………………………. 34,500 Fund balances Restricted……………………….………………………………………………… 25,500 Assigned…………………………………….…………………………………….. 10,000 Total fund balances…………………………………………………………. 35,500 Total liabilities and fund balances……………………………………. $70,000
©Cambridge Business Publishers, 2023 11-44
Advanced Accounting, 5th Edition
The following activities occurred during the year: 1. Investment income and gains are $4,500. 2. Expenditures for capital improvements were as follows: a. Community development and housing projects, $2,500 b. General government projects, $5,000 3. Equipment purchases were as follows: a. Highway and streets, $18,000 b. Culture and recreation, $4,000 4. Accounts payable increased by $2,000, and accrued salaries and wages decreased by $1,500. 5. The general fund transferred $18,000 to the Improvements Fund as part of budgeted outflows, and the Improvements Fund transferred $5,000 to other funds. 6. The Improvements Fund made temporary loans to other funds in the amount of $5,600, and was repaid $4,100. 7. The restricted fund balance at year-end is $18,000. Required Present the operating statement for the year, and the year-end balance sheet for the Improvements Fund, in good form. ANS: Improvements Fund Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Revenues Investment income and gains Total revenues Expenditures Community development and housing General government Capital outlay: Highway and streets Capital outlay: Culture and recreation Total expenditures Excess of revenues over (under) expenditures Other financing sources (uses) Transfers in Transfers out Total other financing sources (uses) Change in fund balances Fund balances, beginning Fund balances, ending
Test Bank, Chapter 11
$ 4,500 4,500 2,500 5,000 18,000 4,000 29,500 (25,000) 18,000 (5,000) 13,000 (12,000) 35,500 $23,500
©Cambridge Business Publishers, 2023 11-45
Improvements Fund Balance Sheet As of Year-End Assets Cash and investments Due from other funds Total assets Liabilities Accounts payable Accrued salaries and wages Total liabilities Fund balances Restricted Assigned Total fund balances 8.
$52,000 6,500 58,500 22,000 13,000 35,000 18,000 5,500 $23,500
Topic: Capital projects fund accounting LO 2 A county plans to build a new courthouse during the current year and sets up a capital projects fund to record activities related to its construction. All of the resources of the capital projects fund are restricted by external entities. The following events are recorded in the capital projects fund during the year: •
• • • • •
•
Total cost of the project is budgeted to be $750 million, and the county records a budget for the project. The funding is as follows: o State grant, $250 million o Bonds, $500 million The state grant is accrued, and $200 million is received in cash. The remaining $50 million is expected to be received within 60 days of year-end. The general fund provides temporary financing to the capital projects fund in the amount of $40 million. The bonds are issued for $501 million. The extra $1 million is paid to the debt service fund. The capital projects fund repays $38 million to the general fund and expects to pay back the remaining $2 million within 60 days of year-end. Excess cash of $300 million is invested in low-risk securities. Income received in cash from investments is $8 million, of which $6.5 million is paid to the debt service fund. Income earned but not paid as of year-end is $0.5 million, but it is not expected to be received in cash until 6 months after year-end. The investments are worth $310 million at year-end. Contracts totaling $700 million are awarded, and contractors submit bills for $400 million during the year. The county has paid $375 million of the bills in cash by year-end.
Required Prepare the operating statement and year-end balance sheet for the capital projects fund, in proper format. Display all dollar amounts in millions. ©Cambridge Business Publishers, 2023 11-46
Advanced Accounting, 5th Edition
ANS: Capital Projects Fund—Courthouse Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year
(in millions) Revenues State grant Investment income Unrealized gains on investments Total revenues Expenditures Contract expenditures Excess of revenues over (under) expenditures Other financing sources (uses) Bond proceeds Transfers out Total other financing sources (uses) Excess of revenues and other financing sources over expenditures and other financing uses Fund balance, beginning Fund balance, ending
$ 250.0 8.0 10.0 $ 268.0 (400.0) (132.0) 500.0 (6.5) 493.5 361.5 0.0 $361.5
Capital Projects Fund—Courthouse Balance Sheet, Year-End (in millions) Assets Cash State grant receivable Investments
Total assets 9.
$
28.5 50.0 310.0
______ $ 388.5
Liabilities & fund balances Liabilities Due to general fund Accounts payable Total liabilities Fund balance—restricted Total liabilities and fund balances
$
2.0 25.0 27.0 361.5 $ 388.5
Topic: Capital projects fund LO 2 The following events occurred in a state’s highway capital projects fund during the past year: 1.
2. 3. 4.
A highway improvement project was authorized, at an expected cost of $45,000,000. This project is expected to last two years. Budgetary accounts are recorded directly on the books of the capital projects fund. Bonds of $35,000,000 were authorized to help finance the project, and the remaining funds were budgeted to come from general fund resources. Bonds of $35,000,000 were issued in the first year at par, and the general fund transferred $10,000,000 to the capital projects fund. Winning bids were accepted from contractors in the amount of $42,900,000. First year expenditures on the project were $33,000,000. $32,000,000 in cash was paid.
The state’s spending policy is to use restricted resources first, and then committed resources. Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-47
Required a. Prepare entries to record the year’s events, including budget, adjusting and closing entries. b. Prepare the highway capital projects fund operating statement for the year, and the end of year balance sheet. ANS: a. Bonds authorized—unissued Estimated other financing sources
35,000,000 10,000,000 Appropriations
45,000,000
Cash
45,000,000 Bond proceeds Transfers in
35,000,000 10,000,000
Encumbrances
42,900,000 Fund balance—restricted Fund balance—committed
Fund balance—restricted
35,000,000 7,900,000 33,000,000
Encumbrances
33,000,000
Expenditures
33,000,000 Cash Accounts payable
32,000,000 1,000,000
Closing entries: Bond proceeds Transfers in
35,000,000 10,000,000 Bonds authorized—unissued Estimated other financing sources
Appropriations
10,000,000 45,000,000
Expenditures Encumbrances Fund balance—committed
©Cambridge Business Publishers, 2023 11-48
35,000,000
33,000,000 9,900,000 2,100,000
Advanced Accounting, 5th Edition
b. Highway Capital Projects Fund Statement of Revenues, Expenditures, and Changes in Fund Balances For the Year Expenditures Other financing sources: Bond proceeds Transfers in Excess of other financing sources over expenditures Fund balances, beginning Fund balances, ending
$(33,000,000) $35,000,000 10,000,000
45,000,000 12,000,000 0 $12,000,000
Highway Capital Projects Fund Balance Sheet, Year-End Assets Cash
Total assets 10.
$ 13,000,000
Liabilities Accounts payable
_________ $ 13,000,000
Fund balances Restricted Committed Total liabilities and fund balances
$
1,000,000
2,000,000 10,000,000 $ 13,000,000
Topic: Capital projects fund transactions LO 2, 3 At the beginning of the current year, a county authorized a $3 million 2% bond issue for the construction of a recreation center. On June 1, the bonds were issued at 100.2, and the additional amount received was transferred to the debt service fund. The renovation occurred later in the year, at a cost of $3 million. On September 30, the general fund transferred to the debt service fund the total amount necessary for payment of semiannual interest on the bonds. On December 1, the debt service fund paid the semiannual interest on the bonds. Required Record all necessary entries to record the above information in the: a. b. c.
Capital projects fund. Include budget and closing entries. General fund. Debt service fund.
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-49
ANS: a.
Capital projects fund entries:
Bonds authorized—unissued Appropriations To record budget. Cash
3,000,000 3,000,000
3,006,000
Bond proceeds Due to debt service fund To record issuance of bonds at 100.2.
3,000,000 6,000
Due to debt service fund Cash To record transfer of bond premium to debt service fund. Capital outlay Cash To record building renovation. Closing entries: Bond proceeds Bonds authorized—unissued Appropriations Capital outlay b.
6,000 6,000
3,000,000 3,000,000
3,000,000 3,000,000 3,000,000 3,000,000
Debt service fund entries Cash
6,000
Transfer in To record transfer of bond premium from capital projects fund.
6,000
Cash
30,000
Transfer in To record transfer from general fund; $30,000 = $3,000,000 x 2% x ½. Expenditure: interest Cash To record interest payment. c.
30,000
30,000 30,000
General fund entry
Transfer out Cash To record transfer to debt service fund.
©Cambridge Business Publishers, 2023 11-50
30,000 30,000
Advanced Accounting, 5th Edition
11.
Topic: Capital projects and debt service funds LO 2, 3 Following are a town’s selected transactions for the year: 1.
A capital projects fund is established for the construction of a new addition to the courthouse. The cost of the project is budgeted at $25,000,000. Funding is to come from the following sources: general obligation bond issue, $15,000,000, grant from the federal government, $10,000,000, and temporary funding from the general fund, $1,000,000.
2.
The general fund advances the agreed-upon $1,000,000 for the project. It expects repayment within 60 days of year-end.
3.
The general obligation bond issue yields a total of $15,100,000. Per town requirements, the premium is transferred to the debt service fund for eventual payment of bond principal.
4.
The federal government pays $6,000,000 on the grant, with the remainder expected within 60 days of year-end.
5.
Bids are taken for the building, and a contract for $24,200,000 is awarded to the qualified low bidder.
6.
Invoices of $18,600,000 are received, representing payments due for partial completion of the contract. The town pays $18,300,000 of the invoices.
7.
The town makes $375,000 in interest and $200,000 in principal payments on the bonds. The general fund made a transfer of $575,000 to the debt service fund, as specified in the town budget, to finance these payments.
Required Prepare the following financial statements: a. b.
Capital projects fund statement of revenues, expenditures, and changes in fund balance for the year, and balance sheet as of year-end. Debt service fund statement of revenues, expenditures, and changes in fund balance for the year, and balance sheet as of year-end.
ANS: a. Capital Projects Fund Statement of Revenues, Expenditures and Changes in Fund Balance For the Year Grant revenue Expenditures Excess of expenditures over revenues Other financing sources: Bond proceeds Excess of revenues and other financing sources over expenditures Beginning fund balance Ending fund balance
Test Bank, Chapter 11
$ 10,000,000 (18,600,000) (8,600,000) 15,000,000 6,400,000 0 $ 6,400,000
©Cambridge Business Publishers, 2023 11-51
Capital Projects Fund Balance Sheet at End of Year Assets Cash Grant receivable
Liabilities and fund balance $3,700,000 Due to general fund 4,000,000 Accounts payable ________ Fund balance—restricted $7,700,000
$1,000,000 300,000 6,400,000 $7,700,000
b. Debt Service Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Expenditures: Debt service—interest Debt service—principal Total expenditures Other financing sources: Transfer in from capital projects fund Transfer in from general fund Total other financing sources Excess of other financing sources over expenditures
$(375,000) (200,000) (575,000) 100,000 575,000 675,000 $ 100,000
Debt Service Fund Balance Sheet at the End of Year Assets Cash 12.
$100,000
Fund balance Fund balance—committed
$100,000
Topic: Debt service fund operating statement LO 3 A county uses a debt service fund to account for events related to a $20,000,000 2.75% general obligation serial bond issue used to finance construction of a new courthouse. For the current year, principal payments of $2,500,000 and interest payments of $550,000 are scheduled. The payments are financed by a transfer from the general fund. In addition, the courthouse capital projects fund transferred $200,000 of excess cash to the debt service fund. The debt service fund invested this cash in securities. Investment income for the year, received in cash, was $7,500. The debt service fund started the year with investments reported at $800,000. No investments were sold, and the fair value of investments at year-end was $1,016,000. Required Prepare the debt service fund operating statement for the year.
©Cambridge Business Publishers, 2023 11-52
Advanced Accounting, 5th Edition
ANS: Debt Service Fund Statement of Revenues, Expenditures, and Changes in Fund Balance Revenues and unrealized gains (losses): Investment income Unrealized investment gains Total revenues and unrealized gains Expenditures: Debt service—interest Debt service—principal Total expenditures Excess of expenditures over revenues Other financing sources: Transfer in from general fund Transfer in from capital projects fund Total other financing sources Excess of revenues and other financing sources over expenditures 13.
$
7,500 16,000 23,500
(550,000) (2,500,000) (3,050,000) (3,026,500) 3,050,000 200,000 3,250,000 $ 223,500
Topic: Enterprise fund reporting LO 4 A county maintains a sewer enterprise fund, which charges citizens sewer fees, and fees to open new sewer lines. The fund has the following statement of net position at the beginning of the year: Sewer Fund Statement of Net Position Beginning of Year Cash $ 45,000 Accounts payable $ 80,000 Accounts receivable 85,000 Net investment in capital assets 900,000 Supplies 25,000 Net position—unrestricted 75,000 Capital assets (less $500,000 accumulated depreciation) 900,000 ______ Total assets $1,055,000 Total liabilities and net position $1,055,000 During the current year, the following activities occur: 1. Residents are billed $100,000 for sewer services and a total of $115,000 is collected from residents. All sewer service receivables are considered fully collectible. 2. Supplies of $140,000 are purchased on credit; supplies on hand at the end of the year total $20,000 and the ending accounts payable balance is $82,000. 3. Capital improvements totaling $150,000 are made to existing sewer facilities. The improvements are financed by issuing a long-term note payable secured by the facilities. Depreciation on capital assets was $60,000. 4. Newly constructed homes are charged $40,000 to access sewer lines. Payment is received in cash. 5. Interest of $2,000 and principal of $30,000 is paid on the note in 3. Required Present the sewer fund’s statement of net position at the end of the year, in good form.
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-53
ANS: Sewer Fund Statement of Net Position End of Year $ 30,000 Accounts payable 70,000 Notes payable 20,000 Net investment in capital assets (1)
Cash Accounts receivable Supplies Capital assets (less $560,000 accumulated depreciation) 990,000 Net position—unrestricted Total assets $1,110,000 Total liabilities and net position (1) $870,000 = $990,000 - $120,000. 14.
$
82,000 120,000 870,000
38,000 $1,110,000
Topic: Enterprise fund net position LO 4 A city reports the activities of its marina in an enterprise fund. At the beginning of the year, the fund’s net position is as follows: Net investment in capital assets Unrestricted Total net position
$3,000 250 $3,250
Information for the year: Ending total assets Ending total liabilities Ending deferred outflows Ending deferred inflows Depreciation expense Interest expense Loss on disposal of capital assets Proceeds from disposal of capital assets Purchases of capital assets Payment of capital asset-related debt principal
$15,000 12,000 1,250 850 650 300 10 90 870 35
Required Present the net position section of the enterprise fund’s Statement of Net Position at year-end. Show calculations clearly. ANS: Total net position = $15,000 + $1,250 - $12,000 - $850 = $3,400 Net investment in capital assets = $3,000 + $870 – ($10 + $90) - $650 + $35 = $3,155 Unrestricted net position = $3,400 - $3,155 = $245 Ending net position, marina enterprise fund Net investment in capital assets Unrestricted Total net position
©Cambridge Business Publishers, 2023 11-54
$3,155 245 $3,400
Advanced Accounting, 5th Edition
15.
Topic: Statement of net position, enterprise fund LO 4 A county reports the activities of its water and sewer services in an enterprise fund. Below is information related to this fund for the current year. Beginning net position: Net investment in capital assets Restricted for programs Unrestricted Total net position
$ 58,000 35,000 51,000 $ 144,000
During the year, the following transactions occurred: 1. Depreciation expense on capital assets was $45,000. 2. Capital assets of $82,000, financed by capital asset-related debt, were acquired. An additional $15,000 in capital assets were not financed by capital asset-related debt. 3. Principal payments on capital asset-related debt were $62,000. Interest payments were $25,000. 4. Principal payments on general debt were $40,000. Interest payments were $52,000. 5. Proceeds from sale of capital assets were $28,000, and losses of $10,000 were recognized on these asset sales. 6. At the end of the year, net position restricted for programs had increased by $6,500. 7. The water and sewer fund’s statement of net position at year-end reports the following balances: Total assets $ 170,000 Total liabilities 25,000 Deferred outflows of resources 3,000 Deferred inflows of resources 1,600 Required a. Calculate the water and sewer fund’s total net position at the end of the year. b. Present the net position section of the water and sewer fund’s statement of net position at the end of the year, in good form. Show calculations clearly. ANS: a.
$170,000 + $3,000 - $25,000 - $1,600 = $146,400
b.
Calculation of net investment in capital assets at end of year: Net investment in capital assets, beginning $ 58,000 - Depreciation expense (45,000) + Acquired capital assets not financed by debt 15,000 + Principal payments on capital asset-related debt 62,000 - Book value of capital assets sold (38,000) Net investment in capital assets, ending $ 52,000 Calculation of restricted net position: $35,000 + $6,500 = $41,500 Calculation of unrestricted net position: $146,400 - $52,000 - $41,500 = $52,900
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-55
Net position section of the water and sewer fund, end of year: Net investment in capital assets $ 52,000 Restricted for programs 41,500 Unrestricted 52,900 Total net position $146,400 16.
Topic: Statement of net position, enterprise fund LO 4 Listed below are accounts of a state’s lottery for the year, as reported in its lottery enterprise fund. All dollar amounts are in millions. Dr (Cr) $ 1,200 1,400 (1,200) (1,000) (10) (185) 8 (2)
Current assets Long-term investments Long-term prizes payable Current liabilities Long-term pension liabilities Net position restricted for future prizes Deferred outflows for pensions Deferred inflows for pensions
Required Prepare a statement of net position, in good form, for the lottery, as of year-end. Note: Net position restricted for future prizes is the only restricted net position account. ANS: Lottery Fund Statement of Net Position End of Year (in millions) Assets: Current assets Noncurrent assets: Long-term investments Total assets Deferred outflows of resources: Pensions Liabilities: Current liabilities Noncurrent liabilities: Long-term prizes payable Pension liabilities Total noncurrent liabilities Total liabilities Deferred inflows of resources: Pensions Net Position: Restricted for future prizes Unrestricted (1) Total net position
$ 1,200 1,400 2,600 8 1,000 1,200 10 1,210 2,210 2
$
185 211 396
(1) $2,600 + 8 – $2,210 – $2 - $185 = $211 ©Cambridge Business Publishers, 2023 11-56
Advanced Accounting, 5th Edition
17.
Topic: Statement of net position, enterprise fund LO 4 Listed below are accounts of a state university, reported in an enterprise fund, as of yearend. Dollar amounts are in millions.
Current assets Deferred outflows: Derivatives activities Accrued noncurrent liabilities Intangible assets, net Deferred outflows: Deferred loss on refunding Land, construction in progress, and artwork Other noncurrent assets Current liabilities Restricted net position Buildings and equipment, net Noncurrent derivative instruments Noncurrent lease obligations Noncurrent pension and OPEB liabilities Net investment in capital assets Deferred outflows: pensions Deferred inflows: pensions
Dr (Cr) $ 1,730 80 (75) 225 35 2,000 480 (1,350) (315) 2,790 (95) (4,500) (1,750) (600) 290 (130)
Required Prepare a statement of net position, in good form, for the state university enterprise fund, as of year-end.
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-57
ANS: STATE UNIVERSITY Statement of Net Position As of Year-End (in millions) Assets: Current assets Noncurrent assets: Land, construction in progress, and artwork Buildings and equipment, net Intangible assets, net Other noncurrent assets Total noncurrent assets Total assets Deferred outflows of resources: Derivatives activities Pensions Deferred loss on refunding Total deferred outflows of resources Liabilities: Current liabilities Noncurrent liabilities: Noncurrent derivative instruments Noncurrent lease obligations Noncurrent pension and OPEB liabilities Accrued noncurrent liabilities Total noncurrent liabilities Total liabilities Deferred inflows of resources: pensions Net Position: Net investment in capital assets Restricted Unrestricted (1) Total net position
$ 1,730 2,000 2,790 225 480 5,495 7,225
80 290 35 405
1,350 95 4,500 1,750 75 6,420 7,770 130
600 315 (1,185) $ (270)
(1) $7,225 + $405 – $7,770 – $130 – $600 – $315 = $(1,185)
©Cambridge Business Publishers, 2023 11-58
Advanced Accounting, 5th Edition
18.
Topic: Statement of cash flows, enterprise fund LO 4 Listed below are the cash inflows and outflows of a state university for the year, as reported in the state’s enterprise fund (in millions): Receipts from hospitals and clinics Transfers from other funds and nonoperating grants Receipts from tuition and fees Payments for operating expenses Purchases of capital assets Receipts from government and private grants and contracts Principal and interest payments on long-term leases Proceeds from sales and maturities of investments Proceeds from short-term loans Repayments of short-term loans Receipts from auxiliary enterprises and other Interest and dividends on investments Capital gifts and grants received Proceeds from capital debt Purchases of investments Proceeds from sale of capital assets Cash balance, beginning
$2,000 3,200 1,650 7,700 1,200 1,300 1,850 370 910 100 850 40 30 1,950 400 150 1,675
Required Prepare a statement of cash flows, in good form, for the state university enterprise fund, for the year.
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-59
ANS: STATE UNIVERSITY Statement of Cash Flows For the Year (in millions) Cash flows from operating activities Receipts from tuition and fees Receipts from government and private grants and contracts Receipts from hospitals and clinics Receipts from auxiliary enterprises and other Payments for operating expenses Net cash used for operating activities
$ 1,650 1,300 2,000 850 (7,700) (1,900)
Cash flows from noncapital financing activities Transfers from other funds and nonoperating grants Proceeds from short-term loans Repayments of short-term loans Net cash from noncapital financing activities
3,200 910 (100) 4,010
Cash flows from capital and related financing activities Proceeds from capital debt Capital gifts and grants received Purchases of capital assets Proceeds from sale of capital assets Principal and interest payments on long-term leases Net cash used for capital and related financing activities
1,950 30 (1,200) 150 (1,850) (920)
Cash flows from investing activities Proceeds from sales and maturities of investments Interest and dividends on investments Purchases of investments Net cash from investing activities Net increase in cash Cash balance, beginning Cash balance, ending
©Cambridge Business Publishers, 2023 11-60
370 40 (400) 10 1,200 1,675 $ 2,875
Advanced Accounting, 5th Edition
19.
Topic: Statement of cash flows, enterprise fund LO 4 Listed below is information reported by a state university for the year, as reported in an enterprise fund (in millions): Decrease in net position Operating loss Cash used for operating activities Increase in accrued operating liabilities Increase in interest payable on capital loans Operating depreciation and amortization Net gains on sales of capital assets Increase in accrued other postemployment benefits Operating losses and write-offs Increase in interest and dividends receivable on investments Decrease in unearned operating revenues Increase in operating receivables and other assets Decrease in fair value of equity investments
$ 540 5,035 2,515 75 10 580 90 650 1,525 5 70 240 80
Required Prepare the required reconciliation schedule for the enterprise fund’s statement of cash flows for the year. Note: Not all items listed are used in this reconciliation. ANS: (in millions) STATE UNIVERSITY Reconciliation of Operating Loss to Cash Used by Operating Activities For the Year Operating loss Increase in accrued operating liabilities Operating depreciation and amortization Increase in accrued other postemployment benefits Operating losses and write-offs Decrease in unearned operating revenues Decrease in operating receivables Cash used for operating activities
Test Bank, Chapter 11
$(5,035) 75 580 650 1,525 (70) (240) $(2,515)
©Cambridge Business Publishers, 2023 11-61
20.
Topic: Statement of cash flows, internal service fund LO 4 Here is financial information for a city’s data processing center for the current year, whose activities are reported in an internal service fund: Change in net position Operating income Depreciation expense Increase in accounts receivable Nonoperating gain on disposal of capital assets Decrease in inventories Increase in net pension liability Increase in OPEB liability Increase in accounts payable Nonoperating investment income
$ 750,000 1,250,000 850,000 100,000 15,000 8,000 200,000 300,000 40,000 62,000
Required Prepare the data processing center’s required reconciliation to cash provided by operations, presented in its statement of cash flows for the year, in good form. ANS: Operating income Adjustments to reconcile operating income to cash provided by operations: Depreciation expense Increase in accounts receivable Decrease in inventories Increase in net pension liability Increase in OPEB liability Increase in accounts payable Cash provided by operations
©Cambridge Business Publishers, 2023 11-62
$1,250,000
850,000 (100,000) 8,000 200,000 300,000 40,000 $2,548,000
Advanced Accounting, 5th Edition
21.
Topic: Capital asset transactions, various funds LO 1, 2, 4 Following are capital asset transactions for Glacier County for the current year: a. b. c. d. e. f.
Office equipment was purchased by a special revenue fund for $20,000. Office equipment was purchased by the water department (an enterprise fund) for $40,000. A building to house the youth center is being constructed; the project is accounted for using a capital projects fund. To date, invoices for $675,000 have been submitted by contractors, and $670,000 of these invoices were paid. Surplus equipment, which had originally cost $250,000, was sold for $15,000. The equipment had an estimated life of 10 years, straight-line, and was sold after five years. The equipment is reported in a capital projects fund. The central motor pool, an internal service fund, purchased new equipment at a cost of $1,000,000 halfway through the year. The equipment has an estimated life of four years, straight-line. The central motor pool, an internal service fund, sold equipment originally costing $2,000,000, with an estimated life of five years, straight-line, for $300,000 when the equipment was four years old.
Required Make the entry or entries, if any, to record each of the above transactions and information in the appropriate fund for Glacier County. Specify the fund in which each entry is recorded. ANS: a.
Special revenue fund Capital outlay (expenditure)
20,000 Cash
b.
20,000
Enterprise fund Equipment (asset)
40,000 Cash
c.
40,000
Capital projects fund Capital outlay (expenditure)
675,000 Cash Accounts payable
d.
Capital projects fund Cash
670,000 5,000
15,000 Proceeds from sale of capital assets (other financing source)
e.
Internal service fund Equipment, net
15,000
1,000,000 Cash
1,000,000
Depreciation expense
125,000 Equipment, net
125,000
$125,000 = ($1,000,000/4) x ½ Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-63
Cash Loss on sale of capital assets
300,000 100,000
Equipment, net $400,000 = $2,000,000 – [($2,000,000/5) x 4] 22.
400,000
Topic: Debt recorded by capital projects and enterprise funds LO 2, 4 $10,000,000 face amount of bonds payable were sold at par by a governmental unit, with the proceeds to be used for the construction of a new building. This building was completed at a total cost of $10,000,000. Required Prepare the journal entries necessary to record the above events, omitting budgetary and closing entries, assuming: a. b.
The governmental unit is the general fund, and the debt will be serviced by general tax revenues. The governmental unit is an enterprise fund, and the debt will be serviced by user fees.
Specify the funds for which your entries are made. ANS: a.
Capital projects fund: Cash
10,000,000 Bond proceeds (other financing sources)
Expenditures: capital outlay
10,000,000 10,000,000
Cash b.
Enterprise fund: Cash
10,000,000
10,000,000 Bonds payable
Buildings
10,000,000 Cash
©Cambridge Business Publishers, 2023 11-64
10,000,000
10,000,000
Advanced Accounting, 5th Edition
23.
Topic: Bond and capital asset transactions, various funds LO 2, 3, 4, 5 Some transactions of a local government appear below: a. b. c. d.
Bond proceeds of $5,004,000 were received by the capital projects fund with a par value of $5,000,000. The premium of $4,000 was immediately transferred to the debt service fund for eventual payment of the principal on the general obligation bonds. Equipment of $3,000,000 was purchased by a city water utility. The debt service fund makes the following payments on general obligation serial bonds: $250,000 in interest, and $800,000 in principal. $1,500,000 in collections are expected to be received from property owners to pay principal and interest on debt incurred in a capital improvement assessment project, where the obligation for the special assessment debt issued is the responsibility of the affected property owners. The assessment is collected from property owners and paid out to the debtholders.
Required Make the entries necessary to record each transaction. Specify the fund(s) affected in each case. ANS: a.
Capital projects fund: Cash
5,004,000 Bond proceeds (other financing sources) Due to debt service fund
Due to debt service fund
5,000,000 4,000 4,000
Cash
4,000
Debt service fund: Cash
4,000 Transfer in (other financing sources)
b.
Enterprise fund: Equipment
4,000
3,000,000 Cash
c.
Debt service fund: Expenditure: Debt service— principal Expenditure: Debt service— interest
3,000,000
800,000 250,000 Cash
Test Bank, Chapter 11
1,050,000
©Cambridge Business Publishers, 2023 11-65
d.
Custodial fund: Assessments receivable
1,500,000 Additions—Collections of taxes
Cash
1,500,000 1,500,000
Assessments receivable Deductions—Taxes distributed
1,500,000 1,500,000
Liability to bondholders Liability to bondholders
1,500,000 1,500,000
Cash 24.
1,500,000
Topic: Custodial fund transactions LO 5 A county builds a new road for residents in a previously undeveloped section of the county, financing the project with $15,000,000 in 2.5% bonds issued on July 1, 2023. The bond principal will be repaid in ten equal installments over the next ten years, on June 30 of each year, starting on June 30, 2024. Affected residents will be assessed over the next ten years to retire the bonds and pay interest on outstanding bonds. The county has no liability for the bonds, and records transactions related to assessment of the residents and payment of the bond principal and interest using a custodial fund. Assume uncollectible amounts are negligible. The county’s year ends on June 30. Required Prepare the journal entries in the custodial fund to: a. b. c. d. ANS: a.
Record the tax levy for fiscal 2024. Record collection of the fiscal 2024 assessment and recognition of the liability to bondholders. Record payment of principal and interest for fiscal 2024. Record the tax levy for fiscal 2025. The amount to be collected from residents = $15,000,000/10 = $1,500,000 in principal and 2.5% x $15,000,000 = $375,000 in interest. Assessments receivable
1,875,000 Additions—Tax collections
1,875,000
b. Cash
1,875,000 Assessments receivable
Deductions—Tax distributions
1,875,000 Liability to bondholders
©Cambridge Business Publishers, 2023 11-66
1,875,000
1,875,000
Advanced Accounting, 5th Edition
c. Liability to bondholders
1,875,000 Cash
d.
1,875,000
The amount to be collected from residents = $15,000,000/10 = $1,500,000 in principal and 2.5% x ($15,000,000 – $1,500,000) = $337,500 in interest. Assessments receivable
1,837,500 Additions—Tax collections
25.
1,837,500
Topic: Custodial fund transactions LO 5 During the year, businesses in Travis County collect $25,000,000 in sales taxes from customers. These taxes are remitted to the county. Sales taxes are shared between the county, the towns located within the county, and the state, with 50% retained by the county for general use, 30% transmitted to the state, and 20% distributed to the towns. By year-end, the county had distributed $4,850,000 of sales taxes due to the towns and $7,400,000 of sales taxes due to the state. Required a. Identify the county funds used to record the above activities. b. Prepare the journal entries to record the above activities in each fund. Clearly identify the fund in which each entry is made. ANS: a. b.
The county records $12,500,000 in sales taxes as revenue to the general fund. The remaining $12,500,000 is reported in a custodial fund. General fund: Cash
12,500,000 Sales tax revenues 50% of sales tax collections are used to finance general fund expenditures. Custodial fund: Cash
12,500,000
Additions—Tax collections To record collection of sales taxes on behalf of the state and towns. Deductions—Taxes distributed
12,500,000
12,500,000
Sales taxes due to towns Sales taxes due to state To record obligation to make payments to the state and towns. Sales taxes due to towns Sales taxes due to state
5,000,000 7,500,000
4,850,000 7,400,000 Cash
Test Bank, Chapter 11
12,500,000
12,250,000
©Cambridge Business Publishers, 2023 11-67
26.
Topic: Fiduciary fund financial statements LO 5 A county has an Investment Trust Fund, a fiduciary fund that reports the external portion of the treasurer’s investment pool. This fund reports on monies from other governments, including county community college districts, that are invested by the county in financial securities. Proceeds from these investments are then distributed to these other governments. The Statement of Net Position for the Investment Trust Fund at the beginning of the year appears below (amounts in millions). Investment Trust Fund Statement of Net Position Beginning of Year
(in millions) ASSETS Cash and investments……..…………………………………………………….. $ 400 Interest receivable…………………………………………………………………. 8 Total assets……………………………………………………………… 408 LIABILITIES AND NET POSITION Liabilities Accounts payable and accrued expenses….………………………… 4 Net position—restricted………………………………………………………… $ 404 During the year, the following events occurred (amounts in millions): 1. Contributions from other governments were $3,500. 2. Distributions to other governments were $3,495. 3. investment income and realized gains were $40; unrealized gains on investments held at year-end were $10. Interest receivable decreased by $2. Costs incurred in managing investments were $3, and are reported as adjustments to investment income. Accounts payable and accrued expenses are the unpaid portion of these costs; this balance increased by $1. Required Prepare the Statement of Changes in Net Position for the year, and the year-end Statement of Net Position for the Investment Trust Fund. Show all amounts in millions.
©Cambridge Business Publishers, 2023 11-68
Advanced Accounting, 5th Edition
ANS: Investment Trust Fund Statement of Changes in Net Position For the Year
(in millions) ADDITIONS Contributions from other governments Investment income (1) Total additions DEDUCTIONS Distributions to other governments Total deductions Increase in net position NET POSITION Beginning of year End of year (1) $47 = $40 + $10 - $3
$ 3,500 47 3,547 3,495 3,495 52 404 $ 456
Investment Trust Fund Statement of Net Position At End of Year
(in millions) ASSETS Cash and investments Interest receivable Total assets LIABILITIES AND NET POSITION Liabilities Accounts payable and accrued expenses Net position—restricted 27.
$ 455 6 461
5 $ 456
Topic: Investments, hedging LO 6 At the beginning of fiscal 2024, a state university issued $6,000,000 in variable rate debt, with interest paid on April 30 of each year, the state’s fiscal year-end. The rate is reset annually. The state reports the activities of the state university in an enterprise fund. The variable rate for the fiscal year is 3%. On the same date, the state enters a receive variable/pay fixed interest rate swap, where the state pays a 3.2% fixed rate to a counterparty. By the end of fiscal 2024, the variable rate has risen to 3.3% and the swap has increased in value by $100,000. The swap qualifies for hedge accounting, per SGAS 53. Required a. Prepare the journal entries necessary to record the above events in the state’s enterprise fund for fiscal 2024. b. Assume that on May 1, 2024, the beginning of fiscal 2025, it is determined that the swap no longer qualifies for hedge accounting. Prepare the appropriate journal entry.
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-69
ANS: a.
May 1, 2023 Cash
6,000,000 Bonds payable
6,000,000
April 30, 2024 Interest expense—bonds Interest expense—counterparty
180,000 12,000 Cash
192,000
Investment in swap
100,000 Deferred inflow: Derivatives
b.
100,000
May 1, 2024 Deferred inflow: Derivatives
100,000 Gain on swap (income)
28.
100,000
Topic: Investments, hedging LO 6 A state enterprise fund has $15 million in variable rate debt, due in 5 years, with the rate set annually on July 1 of each year, interest payable on June 30. On July 1, 2023, the start of its fiscal year, the variable rate on the debt is set at 3.5%. The fund enters a 5-year receive variable/pay fixed interest rate swap, where it agrees to pay a 3.8% fixed rate and receives the amount necessary to pay interest on its variable rate debt. The swap qualifies for hedge accounting, per SGAS 53. The swap has no value on July 1, 2023. Over fiscal year 2024, market interest rates fall, and the swap loses $50,000 in value. On July 1, 2024, the variable rate on the debt is set at 3.4%. Over fiscal year 2025, interest rates rise slightly and the swap gains $4,000 in value. Required Prepare the journal entries the enterprise fund makes to record the above information for fiscal years 2024 and 2025. ANS: June 30, 2024 Interest expense—bonds Interest expense—counterparty Cash To record the interest payment on the debt. Deferred outflows of resources Investment in swap To record the decline in value of the swap.
©Cambridge Business Publishers, 2023 11-70
525,000 45,000 570,000
50,000 50,000
Advanced Accounting, 5th Edition
June 30, 2025 Interest expense—bonds Interest expense—counterparty Cash To record the interest payment on the debt.
510,000 60,000 570,000
Investment in swap Deferred outflows of resources To record the increase in value of the swap. 29.
4,000 4,000
Topic: Landfills LO 6 A county government, with a December 31 year-end, runs a landfill. As of December 31, 2024, the landfill is 35% filled. Total future estimated closure and postclosure costs are $20,000,000. On December 31, 2023, the landfill was 15% filled and future estimated closure and postclosure costs were $15,000,000. Required Prepare the December 31, 2024 journal entry or entries to reflect the above information, if any, assuming the landfill is reported: a. b.
In a governmental fund In an enterprise fund
ANS: a.
No closure and postclosure care costs are recorded when the landfill is in operation. Governmental funds record expenditures when they are incurred, and do not accrue future expenses.
b.
An enterprise fund accrues future closure and postclosure costs related to the current year’s operation of the landfill. Total liability for closure and postclosure costs, December 31, 2024: 35% x $20,000,000 = $7,000,000 Total liability for closure and postclosure costs, December 31, 2023: 15% x $15,000,000 = $2,250,000 Additional costs required to be recorded: $7,000,000 - $2,250,000 = $4,750,000 The journal entry is: Expense—landfill closure and postclosure care
4,750,000 Liability—landfill closure and postclosure care
Test Bank, Chapter 11
4,750,000
©Cambridge Business Publishers, 2023 11-71
30.
Topic: Landfills LO 6 A county operates a landfill, reported in an enterprise fund. For the current fiscal year, operating expenses are $20 million, of which $2 million is depreciation on landfill facilities and $17.8 million is paid in cash. At the start of the fiscal year, the enterprise fund reports a liability for future closure and postclosure care of $24 million. At the end of the fiscal year, the estimated current cost of future closure and postclosure care is $80 million, and the landfill is 40% filled. Required Prepare the journal entries to record the above information in the landfill enterprise fund. ANS: Operating expenses—current operations Capital assets, net Cash Accounts payable To record operating expenses.
20,000,000 2,000,000 17,800,000 200,000
Operating expenses—closure and postclosure costs 8,000,000 Liability for closure and postclosure costs 8,000,000 To adjust the liability for closure and postclosure costs; = ($80,000,000 x 40%) - $24,000,000. 31.
Topic: Asset retirement obligations LO 6 At the beginning of the fiscal year, a county builds a sewage treatment plant, reported in an enterprise fund. The plant is expected to be in service for 35 years. The county is responsible for the plant’s retirement at the end of its life, following all safety and environmental requirements. The estimated present value of the future retirement costs is $7,000,000, to be recognized as expense on a straight-line basis over the plant’s estimated life. Required Prepare the journal entries to record the sewage treatment plant retirement costs for the fiscal year. ANS: Deferred outflows of resources—plant retirement costs 7,000,000 Asset retirement obligation To record the retirement obligation at the beginning of the fiscal year. Asset retirement expense Deferred outflows of resources—plant retirement costs To record current year’s expense; $200,000 = $7,000,000/35.
©Cambridge Business Publishers, 2023 11-72
7,000,000
200,000 200,000
Advanced Accounting, 5th Edition
32.
Topic: Leases LO 6 On July 1, 2023, a county government leases equipment through June 30, 2025. The lease agreement calls for payments as follows: $500,000 due at the lease signing and $600,000 due on July 1, 2024. The lease agreement carries an interest rate of 3.5%. Straight-line depreciation over the life of the lease, with no residual value, is used if appropriate. The county’s fiscal year ends June 30. Required Prepare the entries to record events related to this lease on July 1, 2023, June 30, 2024, July 1, 2024, and June 30, 2025, assuming that: a. b.
The lease is reported in an enterprise fund. The lease is reported in the general fund.
ANS: a.
The present value of the lease payments = $500,000 + ($600,000/1.035) = $1,079,710. July 1, 2023 Leased asset
1,079,710 Lease liability Cash
579,710 500,000
June 30, 2024 Depreciation expense
539,855 Leased asset
539,855
$1,079,710/2 = $539,855 Interest expense
20,290
Interest payable Interest expense for fiscal 2024 = $579,710 x 3.5% = $20,290 July 1, 2024 Interest payable Lease liability
20,290
20,290 579,710 Cash
600,000
June 30, 2025 Depreciation expense
539,855 Leased asset
b.
539,855
July 1, 2023 Expenditures—leases
1,079,710 Other financing sources— leases
Expenditures—principal
500,000 Cash
Test Bank, Chapter 11
1,079,710
500,000
©Cambridge Business Publishers, 2023 11-73
July 1, 2024 Expenditures—interest Expenditures—principal
20,290 579,710 Cash
33.
600,000
Topic: Leases LO 6 On January 1, 2023, a county government leases equipment for three years with these terms: $800,000 is due at signing, and payments of $800,000 per year are due on January 1 of each of the next two years. The lease agreement carries an interest rate of 3%. Straight-line depreciation over three years, no residual value, is used if appropriate. Required Prepare the entries to record events related to this lease on January 1, 2023, December 31, 2023 (the government’s year-end), January 1, 2024, and December 31, 2024, assuming that: a. b.
The equipment is reported in an internal service fund. The equipment is reported in the general fund.
Round all answers to the nearest dollar. ANS: a.
January 1, 2023 Leased asset
2,330,776
Lease liability Cash $2,330,776 = $800,000 + ($800,000/1.03) + ($800,000/(1.03)2) December 31, 2023 Depreciation expense
1,530,776 800,000
776,925 Leased asset
776,925
$2,330,776/3 = $776,925 Interest expense
45,923
Interest payable Interest expense for 2023 = $1,530,776 x 3% = $45,923
45,923
January 1, 2024 Interest payable Lease liability
45,923 754,077 Cash
800,000
December 31, 2024 Depreciation expense
776,925 Leased asset
776,925
Interest expense
23,301
Interest payable Interest expense for 2024 = ($1,530,776 – $754,077) x 3% = $23,301 ©Cambridge Business Publishers, 2023 11-74
23,301
Advanced Accounting, 5th Edition
b.
January 1, 2023 Expenditures—leases
2,330,776 Other financing sources— leases
Expenditures-principal
2,330,776 800,000
Cash
800,000
December 31, 2023 No entry; expenditures are not accrued and depreciation is not recorded since there is no asset. January 1, 2024 Expenditures—interest Expenditures—principal
45,923 754,077 Cash
800,000
December 31, 2024 No entry; expenditures are not accrued and depreciation is not recorded since there is no asset. 34.
Topic: Debt refunding LO 6 A state government has 5% bonds that it issued a few years ago. The bonds were issued at par and are carried at $9 million. Because current interest rates are significantly lower, the state refunds these bonds by issuing new bonds at 2.5%. The 5% bonds require a call premium of $100,000, and the state issues new bonds at par, $9,100,000. Required a. The bonds are general obligation debt, used to fund the activities of the general fund. Prepare the journal entry or entries in the debt service fund to record the issuance of the 2.5% bonds and payment of proceeds to the escrow agent for refunding the 5% bonds. b. The bonds are the obligation of an enterprise fund. Prepare the journal entry or entries to record the issuance of the 2.5% bonds and refunding of the 5% bonds. ANS: a. Cash
9,100,000 Bond proceeds (other financing source)
Payment to escrow (other financing use)
9,100,000 9,100,000
Cash
9,100,000
b. Bonds payable, 5% Deferred outflow— loss on debt refunding
9,000,000 100,000 Bonds payable, 2.5%
Test Bank, Chapter 11
©Cambridge Business Publishers, 2023 11-75
9,100,000
35.
Topic: Debt refunding LO 6 A state has 4.5% fixed rate debt that was issued at a par value of $10 million. Market interest rates have fallen, so the state issues new 3% fixed rate debt at par, and calls in the 4.5% bonds, paying a call premium of $500,000. The proceeds from the new debt are held in an escrow account to be used to pay the old bondholders. Required a. How much 3% debt must be issued to refund the 4.5% bonds? b. Prepare the journal entries to record the above events, assuming the debt refunding is reported in a debt service fund. c. Prepare the journal entries to record the above events, assuming the debt refunding is reported in an enterprise fund. ANS: a. $10,000,000 + $500,000 = $10,500,000. b. Cash
10,500,000
Other financing source—refunding debt issued To record issuance of 3% debt.
c.
Other financing use—payment to escrow agent Cash To record payment to escrow agent. Bonds payable, 4.5% Deferred outflows—loss on refunding Bonds payable, 3%
©Cambridge Business Publishers, 2023 11-76
10,500,000
10,500,000 10,500,000
10,000,000 500,000 10,500,000
Advanced Accounting, 5th Edition
TEST BANK CHAPTER 12 State and Local Governments: External Financial Reporting MULTIPLE CHOICE 1.
2.
3.
Topic: Components of the ACFR LO 1 The ACFR is required to include basic financial statements. Which item below is not included in the basic financial statements? a. b. c. d.
Management’s discussion and analysis Notes to financial statements Fund financial statements Government-wide financial statements
ANS:
a
Topic: Components of the ACFR LO 1 The ACFR is required to include all of the following except a. b. c. d.
Fiduciary funds statement of net position, on a full accrual basis Proprietary funds operating statement, on a full accrual basis Governmental funds balance sheet, on a full accrual basis Government-wide statement of net position, on a full accrual basis
ANS:
c
Topic: Components of the ACFR LO 1 Which financial statements in a government’s ACFR are prepared using modified accrual accounting? a. b. c. d.
Government-wide financial statements Proprietary fund financial statements Governmental fund financial statements Fiduciary fund financial statements
ANS:
c
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-1
4.
Topic: Components of the ACFR LO 1 As compared with modified accrual accounting, full accrual accounting for governments a. b. c. d. ANS:
5.
6.
7.
more accurately reports the impact of current activities on future financial condition. provides more complete information on the government’s ability to pay creditors. more accurately monitors whether the government’s activities are within the constraints of the legal budget. provides more accurate information on internal and external constraints on the ability of the government to spend resources. a
Topic: Government-wide financial statements LO 2 The government-wide financial statements divide activities between which two types? a. b. c. d.
Proprietary and fiduciary Modified accrual and full accrual Governmental and business-type General fund and other major funds
ANS:
c
Topic: Government-wide financial statements LO 2 In the government-wide statement of activities, business-type activities report on the activities of which funds? a. b. c. d.
Governmental and internal service funds Enterprise and internal service funds General fund and enterprise funds Enterprise funds
ANS:
d
Topic: Government-wide financial statements LO 2 The activities of which fund type appear in the governmental activities section of the government-wide financial statements? a. b. c. d.
Pension and OPEB fund Enterprise fund Custodial fund Internal service fund
ANS:
d
© Cambridge Business Publishers, 2023 12-2
Advanced Accounting, 5th Edition
8.
9.
10.
11.
Topic: Government-wide financial statements LO 2 The activities of which fund type do not appear in the governmental activities section of the government-wide financial statements? a. b. c. d.
Special revenue fund Permanent fund Custodial fund Capital projects fund
ANS:
c
Topic: Government-wide financial statements LO 2 The government-wide statement of activities includes all but which one of the following items? a. b. c. d.
Purchases of capital assets General tax revenues Charges for services Expenses of governmental activities
ANS:
a
Topic: Government-wide financial statements LO 2 The government-wide statement of net position includes all but which one of the following items? a. b. c. d.
Buildings and equipment Restricted fund balance Intangible assets Accounts payable
ANS:
b
Topic: Government-wide financial statements LO 2 Which item does not appear on the government-wide statement of activities? a. b. c. d.
Investment income Component unit change in net position Transfers from business-type activities to governmental activities Due from enterprise fund
ANS:
d
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-3
12.
13.
14.
15.
Topic: Government-wide statements LO 2 Which account will you never see reported on the government-wide statement of activities? a. b. c. d.
Enterprise fund expenses Depreciation expense General government expenses Capital outlay
ANS:
d
Topic: Government-wide statements LO 2 Which account might appear on the government-wide statement of net position? a. b. c. d.
Due from general fund to internal service fund Due from special revenue fund to general fund Due from special revenue fund to enterprise fund Due from internal service fund to permanent fund
ANS:
c
Topic: Government-wide statements LO 2 In a government’s statement of activities, where is investment income normally reported? a. b. c. d.
Program revenues: operating grants and contributions General revenues Program revenues: charges for services Transfers
ANS:
b
Topic: Government-wide statements LO 2 At the end of its fiscal year, a county has $200,000 in property taxes expected to be collected within six months. Where is this reported on its government-wide financial statements? a. b. c. d.
Tax revenues on the statement of activities Deferred inflows on the statement of net position Bad debt expense on the statement of activities Not reported
ANS:
a
© Cambridge Business Publishers, 2023 12-4
Advanced Accounting, 5th Edition
16.
Topic: Government-wide financial statements LO 2 At the beginning of fiscal 2023, a county issues two-year general obligation bonds at a par value of $250,000 and an annual coupon rate of 2%, to finance general operations. The bonds are reported by the general fund. The total interest of $10,000 and the principal of $250,000 will be paid to the bondholders at the end of fiscal 2025. At the end of fiscal 2024, how are the bonds and the interest reported in the government-wide financial statements? a. b. c. d. ANS:
17.
General revenues of $250,000 on the statement of activities. Nonoperating revenues of $250,000 on the statement of activities. Revenues of $250,000 and $5,000 in expenses on the statement of activities, and $5,000 interest payable on the statement of net position. Bonds payable of $250,000, and interest payable of $5,000 on the statement of net position, and interest expense of $5,000 on the statement of activities. d
Topic: Government-wide financial statements LO 2 A county’s government-wide statement of net position’s restricted net position balance includes a. b. c. d. ANS:
unspent resources subject to constraints imposed by the state and federal government. reported balances for capital assets, net of depreciation and capital-related debt. unspent resources subject to external constraints and constraints imposed by the county legislature. unspent resources subject to constraints imposed by the state and federal government, and reported balances for capital assets, net of depreciation and capital-related debt. a
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-5
18.
Topic: Government-wide reporting of capital assets LO 2 The funds of a county government report the following noncurrent asset acquisitions during the year: General fund Capital projects fund Special revenue fund Internal service fund Enterprise fund Fiduciary funds
$5,000,000 9,000,000 400,000 3,000,000 6,000,000 500,000
On the government-wide statement of net position, what amount of the above acquisitions will be capitalized as assets?
19.
20.
a. b. c. d.
$23,900,000 $23,400,000 $14,400,000 $17,900,000
ANS:
b $5,000,000 + $9,000,000 + $400,000 + $3,000,000 + $6,000,000 = $23,400,000
Topic: Government-wide and fund financial statements LO 2, 3 In the statement of net position, the net position section is displayed using the same categories for a. b. c. d.
Governmental funds and proprietary funds. Government-wide statements and proprietary funds. Proprietary funds and fiduciary funds. Government-wide statements and fiduciary funds.
ANS:
b
Topic: Government-wide and fund financial statements LO 2, 3 The year-end balances of assets of fiduciary funds are reported a. b. c. d.
only on the statement of fiduciary net position. on the government-wide statement of net position and on the statement of fiduciary net position. only on the balance sheet of governmental funds. on none of the financial statements.
ANS:
a
© Cambridge Business Publishers, 2023 12-6
Advanced Accounting, 5th Edition
21.
Topic: Government-wide and fund financial statements LO 2, 3 The year-end balance for buildings and equipment of governmental funds is reported a.
22.
b. c. d.
on the government-wide statement of net position and on the balance sheet of governmental funds. only on the balance sheet of governmental funds. only on the government-wide statement of net position. on none of the financial statements.
ANS:
c
Topic: Government-wide and fund financial statements LO 2, 3 The year-end balance of amounts due from other governmental funds to the general fund is reported a. b.
23.
c. d.
only on the balance sheet of governmental funds. on the government-wide statement of net position and on the balance sheet of governmental funds. only on the government-wide statement of net position. on none of the financial statements.
ANS:
a
Topic: Government-wide and fund financial statements LO 2, 3 The year-end balance of amounts due from an enterprise fund to a special revenue fund is reported a. b. c.
24.
d.
only on the balance sheets of governmental funds and proprietary funds. only on the government-wide statement of net position. on the government-wide statement of net position and on the balance sheets of governmental funds and proprietary funds. on none of the financial statements.
ANS:
c
Topic: Government-wide and fund financial statements LO 2, 3 The year-end balance of amounts due from other governments to the enterprise fund is reported a. b. c. d.
on the government-wide statement of net position and on the statement of net position of proprietary funds. only on the government-wide statement of net position. only on the statement of net position of proprietary funds. on none of the financial statements.
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-7
ANS: 25.
26.
Topic: Government-wide and fund financial statements LO 2, 3 Deferred inflows and outflows of resources may be found on a. b. c. d.
the government-wide statement of net position only. the government-wide and proprietary funds statements of net position. the proprietary and fiduciary funds statements of net position. the government-wide, proprietary and fiduciary statements of net position and the governmental funds balance sheet.
ANS:
d
Topic: Fund financial statements LO 3 Which fund statements are presented in the ACFR for governmental funds? a.
27.
b. c. d.
Balance sheet, statement of revenues, expenses and changes in net position, and statement of cash flows Statement of net position and statement of changes in net position Balance sheet and statement of revenues, expenses and changes in net position Balance sheet and statement of revenues, expenditures, and changes in fund balances
ANS:
d
Topic: Fund financial statements LO 3 Which fund financial statements are presented in the ACFR for proprietary funds? a.
28.
a
b. c. d.
Statement of net position, statement of revenues, expenses and changes in net position, and statement of cash flows Statement of net position and statement of changes in net position Balance sheet and statement of revenues, expenses and changes in net position Balance sheet and statement of revenues, expenditures, and changes in fund balances
ANS:
a
Topic: Fund financial statements LO 3 Which fund financial statements are presented in the ACFR for fiduciary funds? a. b. c. d.
Balance sheet, statement of revenues, expenses and changes in net position, and statement of cash flows Statement of net position and statement of changes in net position Balance sheet and statement of revenues, expenses and changes in net position Balance sheet and statement of revenues, expenditures, and changes in fund balances
© Cambridge Business Publishers, 2023 12-8
Advanced Accounting, 5th Edition
ANS: 29.
b
Topic: Fund financial statements LO 3 The operating statement for fiduciary funds includes the activities of which fund types? a. b. c. d. ANS:
Pension and other employee benefit trust funds and investment trust funds Custodial funds Pension and other employee benefit trust funds, investment trust funds, privatepurpose trust funds, and custodial funds Pension and other employee benefit trust funds, investment trust funds, and private-purpose trust funds c
Use the following information to answer Questions 30 and 31 below: Here is information for a county government: Total assets and deferred outflows Total liabilities and deferred inflows Total revenues Total expenditures/expenses
Governmental funds $ 45,000,000 44,000,000 250,000,000 242,000,000
Enterprise funds $ 40,000,000 38,000,000 290,000,000 260,000,000
The county has four special revenue funds, with the following characteristics: Beach Health Community preservation education protection Total assets and deferred outflows $ 2,000,000 $ 4,000,000 $ 4,800,000 Total liabilities and deferred inflows 1,000,000 3,500,000 1,800,000 Total revenues 20,000,000 30,000,000 30,000,000 Total expenditures 15,000,000 26,000,000 25,000,000 30.
Emergency call service $ 1,900,000 1,100,000 26,000,000 24,000,000
Topic: Major funds LO 3 Which of these special revenue funds meet the first criterion for reporting as major funds in the governmental funds financial statements? a. b. c. d.
Health education fund only Health education, community protection, and emergency call service funds Health education and community protection funds Beach preservation and health education funds
ANS:
b
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-9
31.
Topic: Major funds LO 3 Which of these special revenue funds also meet the second criterion for reporting as a major fund in the governmental funds financial statements, and therefore will be reported as major funds? a. b. c. d.
Health education fund only Health education, community protection, and emergency call service funds Health education and community protection funds Beach preservation and health education funds
ANS:
c
Notes for Questions 30 and 31: To be major funds, the special revenue funds must first meet one of the following (10% of governmental funds total): Total assets and deferred outflows at least $ 4,500,000 Total liabilities and deferred inflows at least 4,400,000 Total revenues at least 25,000,000 Total expenditures at least 24,200,000 The health education fund meets the total revenues and total expenditures criteria. The community protection fund meets the total assets and deferred outflows, total revenues, and total expenditures criteria. The emergency call service fund meets the total revenues criterion. If a fund meets the first test, the following test is applied (5% of governmental and enterprise funds total, on the same element): Total assets and deferred outflows at least $ 4,250,000 Total liabilities and deferred inflows at least 4,100,000 Total revenues at least 27,000,000 Total expenditures at least 25,100,000 The health education fund passes the total revenues and total expenditures criteria. The community protection fund meets the total assets and deferred outflows and total revenues criteria. Use the following information to answer Questions 32 and 33 below: Here is information for a county government: Governmental funds Total assets and deferred outflows $ 45,000,000 Total liabilities and deferred inflows 16,000,000 Total revenues 250,000,000 Total expenditures /expenses 242,000,000
Enterprise funds $ 102,000,000 48,000,000 280,000,000 160,000,000
The county has four capital projects funds, with the following characteristics: © Cambridge Business Publishers, 2023 12-10
Advanced Accounting, 5th Edition
Total assets and deferred outflows Total liabilities and deferred inflows Total revenues Total expenditures 32.
33.
Road fund
Bridges fund
Buildings fund
Equipment fund
$ 3,000,000
$ 4,000,000
$ 3,500,000
$ 7,000,000
1,500,000 23,000,000 22,000,000
1,200,000 26,000,000 23,000,000
2,000,000 22,000,000 20,000,000
3,000,000 26,800,000 26,000,000
Topic: Major funds LO 3 Which of these capital projects funds meet the first criterion for reporting as major funds in the governmental funds financial statements? a. b. c. d.
Equipment fund only Buildings fund and equipment fund Bridges fund, buildings fund, and equipment fund Bridges fund and equipment fund
ANS:
c
Topic: Major funds LO 3 Which of these capital projects funds also meet the second criterion for reporting as major funds, and therefore are reported as major funds in the governmental funds financial statements? a. b. c. d.
Equipment fund only Buildings fund and equipment fund Bridges fund, buildings fund, and equipment fund Bridges fund and equipment fund
ANS:
a
Notes for Questions 32 and 33: The minimums for each of the two tests are as follows: Test #1 Test #2 Assets and deferred outflows $ 4,500,000 $ 7,350,000 Liabilities and deferred inflows 1,600,000 3,200,000 Revenues 25,000,000 26,500,000 Expenditures 24,200,000 20,100,000
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-11
The test results are as follows (pass test 1, and if yes, pass test 2): Road Bridges fund fund Total assets and deferred outflows no no Total liabilities and deferred inflows no no Total revenues no yes, no Total expenditures no no
Buildings fund no yes, no no no
Equipment fund yes, no yes, no yes, yes yes, yes
The equipment fund passes both revenues and expenditures tests. The other funds are not major funds. 34.
35.
Topic: Major funds LO 3 Which statement is false regarding separate disclosure of funds in the fund financial statements? a. b. c. d.
Internal service funds are reported in total regardless of the size of the individual funds. Only major enterprise funds are separately reported. Only major governmental funds are separately reported. Only major fiduciary funds are separately reported.
ANS:
d
Topic: Fund financial statements LO 3 On the governmental funds balance sheet, deferred inflows may report a. b. c. d.
capital assets, net of depreciation. tax revenues expected to be collected after 60 days. bond refunding losses. unamortized asset retirement costs.
ANS:
b
© Cambridge Business Publishers, 2023 12-12
Advanced Accounting, 5th Edition
36.
37.
Topic: Reconciliation of change in fund balances to change in net position LO 3 A city’s general fund bought equipment for $100,000. The equipment was estimated to have a 5-year life, straight-line, no salvage value. Two years later, it sold the equipment for $70,000. In a reconciliation of change in fund balances of governmental funds to change in net position of governmental activities, what adjustment is needed in the year of the sale? a. b. c. d.
add $40,000 subtract $20,000 subtract $60,000 add $60,000
ANS:
c Subtract book value of $100,000 x 3/5 = $60,000
Topic: Reconciliation of change in fund balances to change in net position LO 3 During the year a city’s general fund issued bonds for $1,000,000. The debt service fund paid bond principal of $200,000 and bond interest of $450,000. In a reconciliation of change in fund balances of governmental funds to change in net position of governmental activities for the year, what net adjustment is needed? a. b. c. d.
subtract $800,000 subtract $350,000 add $800,000 add $350,000
ANS:
a Subtract $1,000,000 and add $200,000.
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-13
38.
Topic: Reconciliation of change in fund balances to change in net position LO 3 Here is information on the results of operations of a local government for the current year: Change in fund balances, governmental funds $5,000,000 Increase in internal service net position 100,000 Payments of principal on general long-term debt 1,200,000 Decrease in pension liability 3,000,000 Outlays for general capital assets 2,500,000 Depreciation expense on general capital assets 1,400,000 The change in net position of governmental activities, reported on the government-wide statement of activities, is:
39.
a. b. c. d.
$ 8,000,000 $ 2,200,000 $10,400,000 $ 5,400,000
ANS:
c $5,000,000 + $100,000 + $1,200,000 + $3,000,000 + $2,500,000 - $1,400,000 = $10,400,000
Topic: Reconciliation of change in fund balances to change in net position LO 3 Here is information on the results of operations of a county government for the current year: Change in fund balances, governmental funds $2,000,000 Accrued pension expenses of governmental funds 100,000 Payments of principal on general long-term debt 1,500,000 Proceeds from issuing general long-term debt 6,000,000 Outlays for general capital assets 4,000,000 Depreciation expense on general capital assets 500,000 Net loss on disposal of general capital assets 60,000 Proceeds from the sale of general capital assets 200,000 The change in net position of governmental activities, reported on the government-wide statement of activities, is: a. b. c. d.
$1,640,000 $1,140,000 $ 640,000 $1,040,000
ANS:
c $2,000,000 - $100,000 + $1,500,000 - $6,000,000 + $4,000,000 - $500,000 - $60,000 $200,000 = $640,000
© Cambridge Business Publishers, 2023 12-14
Advanced Accounting, 5th Edition
40.
Topic: Reconciliation of change in fund balances to change in net position LO 3 Here is information on activities of governmental funds for a county government for the current year: Change in fund balances $1,500,000 Depreciation expense 600,000 Proceeds from issuing general long-term debt 3,000,000 Outlays for general capital assets 2,800,000 Increase in pension and OPEB liability 100,000 Loss on disposal of general capital assets 10,000 Proceeds from the sale of general capital assets 150,000 Amortization of bond premiums 4,000 The change in net position of governmental activities, reported on the government-wide statement of activities, is:
41.
a. b. c. d.
$464,000 $444,000 $644,000 $764,000
ANS:
b $1,500,000 - $600,000 - $3,000,000 + $2,800,000 - $100,000 - $10,000 - $150,000 + $4,000 = $444,000
Topic: Reconciliation of fund balances to net position LO 3 Here is information on a county government’s governmental funds at the end of the current year: Fund balances, governmental funds $ 6,000,000 Accrued interest on long-term debt 50,000 Principal of long-term debt 10,000,000 Capital assets net of accumulated depreciation 8,000,000 Net OPEB obligation 700,000 Net pension obligation 2,500,000 The net position of governmental activities, reported on the government-wide statement of net position, is: a. b. c. d.
$11,250,000 $ 750,000 $ 7,250,000 $ 5,750,000
ANS:
b $6,000,000 - $50,000 - $10,000,000 + $8,000,000 - $700,000 - $2,500,000 = $750,000
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-15
42.
Topic: Reconciliation of fund balances to net position LO 3 Here is information on a town government’s governmental funds at the end of the current year: Fund balances, governmental funds $ 14,000,000 Accumulated depreciation, capital assets 22,000,000 Principal of long-term debt 45,000,000 Noncurrent accrued compensated absences 2,000,000 Capital assets, at cost 65,000,000 Net pension and OPEB obligation 30,000,000 The net position of governmental activities at the end of the current year is: a. $32,000,000 b. $(16,000,000) c. $2,000,000 d. $(20,000,000) ANS:
43.
44.
d $14,000,000 + ($65,000,000 - $22,000,000) - $45,000,000 - $2,000,000 - $30,000,000 = $(20,000,000)
Topic: Reconciliation of change in fund balances to change in net position LO 3 In a reconciliation of change in fund balances—governmental funds to change in net position— governmental activities, which one of the following is not a correct reconciliation item? a. b. c. d.
Subtract amortization of deferred outflows from governmental debt refunding losses Subtract the increase in accrued interest on governmental funds long-term debt Subtract the increase in net pension obligation of governmental funds Add the net loss on disposal of capital assets of governmental funds
ANS:
d
Topic: Reconciliation of change in fund balances to change in net position LO 3 In a reconciliation of change in fund balances—governmental funds to change in net position— governmental activities, which one of the following is a correct reconciliation item? a. b. c. d.
Add loan and commercial paper issuance proceeds of governmental funds Add principal payments of long-term debt of governmental funds Add interest payments of long-term debt of governmental funds Subtract the decrease in OPEB obligations of governmental funds
ANS:
b
© Cambridge Business Publishers, 2023 12-16
Advanced Accounting, 5th Edition
45.
46.
Topic: Reconciliation of fund balances to net position LO 3 In a reconciliation of total governmental fund balances to net position of governmental activities, which one of the following is not a correct reconciliation item? a. b. c. d.
Subtract accrued interest on long-term debt of governmental funds Subtract noncurrent compensated employee absences payable of governmental funds Add fiduciary fund net position Add intangible assets of governmental funds
ANS:
c
Topic: Reconciliation of fund balances to net position LO 3 In a reconciliation of fund balances—governmental funds to net position—governmental activities, which one of the following is a correct reconciliation item? a. b. c. d.
Subtract capital lease obligations of governmental funds Subtract the net position of internal service funds Add the proceeds from sale of capital assets Add accrued interest payable
ANS:
a
Use the following information to answer Questions 47 – 52 below: At the beginning of the current fiscal year, the county government signs a 2-year lease, with $80,000 paid at signing, and $80,000 due at the end of the fiscal year. The lease has an implicit interest rate of 3.5%, the present value of the lease payments is $157,670, and the leased equipment has an estimated life equal to the life of the lease, no residual value. 47.
Topic: Leases LO 3 The lease is reported in the general fund. What asset is reported for this lease in the governmental funds balance sheet at the end of the fiscal year? a. b. c. d.
Leased asset, $157,670 Leased asset, $160,000 Leased asset, $78,835 No asset is reported.
ANS:
d
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-17
48.
49.
50.
Topic: Leases LO 3 The lease is reported in the general fund. What amount is reported as expenditures for this lease in the fiscal year governmental funds statement of revenues, expenditures and changes in fund balances? a. b. c. d.
$157,670 $317,670 $160,000 $ 81,165
ANS:
b $157,670 + $80,000 + $80,000 = $317,670.
Topic: Leases LO 3 The lease is reported in an enterprise fund. What asset is reported for this lease in the proprietary funds statement of net position at the end of the fiscal year? a. b. c. d.
Leased asset, $157,670 Leased asset, $160,000 Leased asset, $78,835 No asset is reported.
ANS:
c $157,670 - $78,835 = $78,835
Topic: Leases LO 3 The lease is reported in an enterprise fund. What amount is reported as total expenses for this lease in the fiscal year proprietary funds statement of revenues, expenses and changes in net position? a. b. c. d.
$157,670 $317,670 $160,000 $ 81,165
ANS:
d $2,330 + $78,835 = $81,165
© Cambridge Business Publishers, 2023 12-18
Advanced Accounting, 5th Edition
51.
52.
Topic: Reconciliation of change in fund balances to change in net position LO 3 In a reconciliation of change in fund balances—governmental funds to change in net position— governmental activities, what net adjustment is made for the lease? a. b. c. d.
Add $236,505 Add $157,670 Add $160,000 Add $78,835
ANS:
d $80,000 + $77,670 - $78,835 = $78,835
Topic: Reconciliation of fund balances to net position LO 3 In a reconciliation of fund balances—governmental funds to net position—governmental activities, what net adjustment is made for the lease? a. b. c. d.
Add $236,505 Add $157,670 Add $160,000 Add $78,835
ANS:
d $157,670 - $78,835 = $78,835
Notes for Questions 47 – 52: Entries for general fund: Beginning of fiscal year Expenditures—leases (capital outlay) Other financing sources—leases Expenditures—principal Cash End of fiscal year Expenditures—interest Expenditures—principal Cash To record lease payment; $2,330 = $77,670 x 3%.
157,670 157,670 80,000 80,000
2,330 77,670 80,000
Entries for the enterprise fund: Beginning of fiscal year Leased equipment Lease liability Test Bank, Chapter 12
157,670 157,670 © Cambridge Business Publishers, 2023 12-19
Lease liability Cash End of fiscal year Interest expense Lease liability Cash
80,000 80,000
2,330 77,670 80,000
Depreciation expense 78,835 Leased equipment 78,835 To record depreciation expense on the leased equipment. $78,835 = $157,670/2. For questions 53 –63 below, use the numbers from the following financial statements required in a county government’s ACFR to identify where the specific account is reported: 1. 2. 3. 4. 5. 6. 7. 8. 53.
54.
Government-wide statement: Statement of net position Government-wide statement: Statement of activities Fund statement: Balance sheet–Governmental funds Fund statement: Statement of revenues, expenditures and changes in fund balances– Governmental funds Fund statement: Statement of net position–Proprietary funds Fund statement: Statement of revenues, expenses and changes in net position–Proprietary funds Fund statement: Statement of fiduciary net position Fund statement: Statement of changes in fiduciary net position Topic: Government-wide and fund statements LO 2, 3, 4 On which financial statement(s) are proceeds from disposal of capital assets of governmental funds reported? a. b. c. d.
2 2 and 4 4 only none
ANS:
c
Topic: Government-wide and fund statements LO 2, 3, 4 On which financial statement(s) are the proceeds from disposal of capital assets of proprietary funds reported? a. b. c. d.
2 and 6 6 2 none
© Cambridge Business Publishers, 2023 12-20
Advanced Accounting, 5th Edition
ANS: 55.
56.
57.
58.
d
Topic: Government-wide and fund statements LO 2, 3, 4, 5 On which financial statement(s) are unrealized losses on hedging derivatives investments of proprietary funds reported? a. b. c. d.
1 5 1 and 5 2 and 6
ANS:
c Unrealized derivatives losses are reported as deferred outflows of resources.
Topic: Government-wide and fund statements LO 2, 3, 4, 5 On which financial statement(s) are bonds payable of governmental funds reported? a. b. c. d.
1 1 and 3 3 none
ANS:
a
Topic: Government-wide and fund statements LO 2, 3, 4 On which financial statement(s) are bonds payable of proprietary funds reported? a. b. c. d.
1 5 1 and 5 none
ANS:
c
Topic: Government-wide and fund statements LO 2, 3, 4 On which financial statement(s) are liabilities for payment of taxes collected for other governments reported? a. b. c. d.
1 1 and 7 7 none
ANS:
c
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-21
59.
60.
61.
62.
Topic: Government-wide and fund statements LO 2, 3, 4 On which financial statement(s) are deferred outflows for bond refunding by governmental funds reported? a. b. c. d.
1 1 and 3 2 2 and 4
ANS:
a
Topic: Government-wide and fund statements LO 2, 3, 4 On which financial statement(s) are capital assets of permanent funds reported? a. b. c. d.
1 1 and 3 3 none
ANS:
a
Topic: Government-wide and fund statements LO 2, 3, 4 On which financial statement(s) are the amount of taxes collected for other governments reported? a. b. c. d.
2 2 and 8 8 none
ANS:
c
Topic: Government-wide and fund statements LO 2, 3, 4 On which financial statement(s) are capital assets of internal service funds reported? a. b. c. d.
1 1 and 5 5 7
ANS:
b
© Cambridge Business Publishers, 2023 12-22
Advanced Accounting, 5th Edition
63.
64.
Topic: Government-wide and fund statements LO 2, 3, 4 On which financial statement(s) are principal payments made by governmental funds reported? a. b. c. d.
2 4 2 and 4 1 and 3
ANS:
b
Topic: Comparison of government-wide and funds information LO 4 A city’s governmental funds balance sheet reports total assets of $71 million. The governmentwide statement of net position for the same date reports total assets of governmental activities of $350 million. What is the most likely reason for the discrepancy between these two numbers? a. b. c. d. ANS:
65.
The government-wide statement of net position reports capital assets used by governmental funds while the governmental funds balance sheet does not. The government-wide statement of net position reports pension investments related to governmental fund employees while the governmental funds balance sheet does not. The government-wide statement of net position includes internal service fund assets in governmental activities, while the governmental funds balance sheet does not. The government-wide statement of net position reports long-term debt of governmental funds while the governmental funds balance sheet does not. a
Topic: Comparison of government-wide and funds information LO 4 In a county’s ACFR for the current fiscal year, governmental activities expenses on the government-wide statement of activities are $200 million and governmental fund expenditures on the governmental funds statement of revenues, expenditures, and changes in fund balances are $225 million. What is a possible reason why expenditures are higher than expenses? a. b. c. d.
Large principal payments on general obligation debt. Large accruals of pension benefits not requiring current resources. Large amounts of general obligation debt issued. Large amounts of depreciation expense on governmental capital assets.
ANS:
a
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-23
66.
Topic: Comparison of government-wide and funds information LO 4 A state’s governmental funds balance sheet at fiscal year-end reports total liabilities of $20 billion. The state’s government-wide statement of net position at fiscal year-end reports total liabilities of governmental activities of $200 billion. What is likely to be the major reason for the large discrepancy between these two numbers? a. b. c. d. ANS:
67.
68.
The government-wide statement includes internal service fund liabilities while the governmental funds statement does not. The government-wide statement reports amounts due to other governments and agencies while the governmental funds statement does not. The government-wide statement reports bond and pension liabilities of governmental funds while the governmental funds statement does not. The government-wide statement reports deferred outflows from bond refundings while the governmental funds statement does not. c
Topic: Comparison of government-wide and funds information LO 4 A county’s ACFR shows an increase in fund balances of governmental funds of $25 million and an increase in net position of governmental activities of $3 million. What would be a reason why the change in net position of governmental activities is $22 million lower than the change in fund balances of governmental funds? a. b. c. d.
Depreciation expense is $22 million lower than purchases of capital assets. Expenses for OPEB benefits are $22 million lower than repayments of debt principal. Internal service fund net position increases by $18 million. Purchases of capital assets are $22 million lower than accrued expenses not requiring current resources.
ANS:
d
Topic: Comparison of government-wide and funds information LO 4 A county’s operating statement for governmental funds reports general government expenditures of $25 million. The statement of activities reports general government expenses of $62 million. Which one of the following items would not help explain why general government expenses are greater than general government expenditures? a. b. c. d. ANS:
The $62 million of expenses includes accrued expenses not requiring current resources. The $25 million of expenditures does not include depreciation on general government capital assets. The $25 million of expenditures includes purchases of capital assets. The $62 million of expenses includes pension benefits earned by general government employees this year. c
© Cambridge Business Publishers, 2023 12-24
Advanced Accounting, 5th Edition
69.
70.
71.
Topic: Comparison of government-wide and funds information LO 4 In its government-wide statement of net position, a county government reports total assets of $400 million for governmental activities. In the governmental funds balance sheet, total assets for governmental funds are $100 million. Which item could explain why total assets of governmental activities is higher than total assets of governmental funds? a. b. c. d.
Investment in financial instruments Intangible assets Accounts receivable Deferred outflows of resources
ANS:
b
Topic: Comparison of government-wide and funds information LO 4 In its statement of activities, a county government reports general government expenses of $400 million. In the governmental funds operating statement, general government expenditures are $340 million. Which item would be least likely to account for the discrepancy between these two numbers? a. b. c. d.
interfund loans pension costs depreciation compensated absences
ANS:
a
Topic: Comparison of government-wide and funds information LO 4 A county reports total expenses of governmental activities of $200 million, but total governmental fund expenditures of $90 million. Which item below would help explain why expenses of governmental activities are higher than governmental fund expenditures? a. b. c. d.
Principal payments on bonds Depreciation on buildings and equipment Investments in securities Salaries and wages for administrative staff
ANS:
b
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-25
72.
73.
Topic: Budgetary comparison schedules LO 4 A county’s general fund budgetary comparison schedule shows the actual change in fund balances as $(4,000,000). Unbudgeted activities reduced fund balances by $1,500,000, GAAP basis revenue accruals were $8,000,000, and GAAP basis expenditure accruals were $5,000,000. On the general fund statement of revenues, expenditures, and changes in fund balances, what is the change in fund balances? a. b. c. d.
$(1,000,000) $(2,500,000) $(5,500,000) $(4,000,000)
ANS:
b $(4,000,000) - $1,500,000 + $8,000,000 - $5,000,000 = $(2,500,000)
Topic: Budgetary comparison schedules LO 4 In the footnotes to the financial statements of a ACFR, there is a schedule reconciling the general fund “budgetary actual” results to the actual change in fund balances reported by the general fund in its operating statement. Which one of the following is least likely to be included as a reconciliation item in this schedule? a. b. c. d. ANS:
The general fund accrues tax revenues to be received after the end of the year, while the legal budget does not include these as revenues. The general fund includes the results of some activities that are not included in its legal budget. The general fund accrues pension benefits earned by current employees, while the legal budget does not include these as expenditures. The legal budget reports outstanding encumbrances at year-end as expenditures, while the general fund does not. c
© Cambridge Business Publishers, 2023 12-26
Advanced Accounting, 5th Edition
74.
Topic: Budgetary comparison schedules LO 4 Here is information on a county’s general fund performance for the year: Revenues and other financing sources in excess of expenditures and other financing uses—GAAP basis Outstanding encumbrances, beginning of year Outstanding encumbrances, end of year
$450,000 20,000 15,000
What are revenues and other financing sources in excess of expenditures and other financing uses for the year, appearing on the budgetary comparison schedule, which reports encumbrances using the legal budgetary basis?
75.
a. b. c. d.
$445,000 $455,000 $430,000 $465,000
ANS:
b $450,000 + $20,000 - $15,000 = $455,000
Topic: Budgetary comparison schedules LO 4 Below is information on a county’s results of operations for the current year, for the general fund. Excess of revenues and other financing sources over expenditures and other financing uses, legal budget basis Revenues accrued on the modified accrual basis but not on a budget basis Excess of revenues over expenditures for unbudgeted activities and funds Outstanding encumbrances of governmental funds, beginning of year Outstanding encumbrances of governmental funds, end of year
$670,000 40,000 25,000 8,000 5,000
What is the excess of revenues and other financing sources over expenditures and other financing uses for the general fund, as reported in the governmental funds operating statement, prepared on a modified accrual basis, using the GAAP basis for encumbrances? a. b. c. d.
$738,000 $735,000 $732,000 $710,000
ANS:
c $670,000 + $40,000 + $25,000 - $8,000 + $5,000 = $732,000
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-27
Use the following information to answer Questions 76 – 81 below: At the beginning of fiscal 2024, a county government acquires equipment for $4,000,000. The equipment has an estimated life of 5 years, and straight-line depreciation is used, with no residual value, if appropriate. At the end of fiscal 2025 (two years later), the government disposes of the equipment for $1,800,000. 76.
Topic: Capital assets in the government-wide and funds statements LO 5 If the equipment is reported in the general fund, how does it appear in the fiscal 2024 ACFR? a. b. c. d. ANS:
77.
$4,000,000 expenditure in the governmental funds operating statement and the government-wide statement of activities. $4,000,000 expenditure in the governmental funds operating statement and $3,200,000 capital asset in the government-wide statement of net position. $3,200,000 capital asset in the governmental funds balance sheet and the governmentwide statement of net position. $4,000,000 other financing use in the governmental funds operating statement and $3,200,000 capital asset in the government-wide statement of net position. b
Topic: Capital assets in the government-wide and funds statements LO 5 If the equipment is reported in an internal service fund, how does it appear in the fiscal 2024 ACFR? a. b. c. d. ANS:
$4,000,000 expenditure in the proprietary funds operating statement and the government-wide statement of activities. $4,000,000 expenditure in the proprietary funds operating statement and $3,200,000 capital asset in the government-wide statement of net position. $3,200,000 capital asset in the proprietary funds balance sheet and the governmentwide statement of net position. $4,000,000 other financing use in the proprietary funds operating statement and $3,200,000 capital asset in the government-wide statement of net position. c
© Cambridge Business Publishers, 2023 12-28
Advanced Accounting, 5th Edition
78.
Topic: Capital assets in the government-wide and funds statements LO 5 If the equipment is reported in the general fund, how is its disposal reported in the fiscal 2025 ACFR? a. b. c. d. ANS:
79.
d
Topic: Capital assets in the government-wide and funds statements LO 5 If the equipment is reported in an internal service fund, how is its disposal reported in the fiscal 2025 ACFR? a. b. c. d. ANS:
80.
$1,800,000 revenue in the governmental funds operating statement and the government-wide statement of activities. $1,800,000 revenue in the governmental funds operating statement and $600,000 loss in the government-wide statement of activities. $600,000 loss in the governmental funds operating statement and the government-wide statement of activities. $1,800,000 other financing source in the governmental funds operating statement and $600,000 loss in the government-wide statement of activities.
$1,800,000 revenue in the proprietary funds operating statement and the governmentwide statement of activities. $1,800,000 revenue in the proprietary funds operating statement and $600,000 loss in the government-wide statement of activities. $600,000 loss in the proprietary funds operating statement and the government-wide statement of activities. $1,800,000 other financing source in the proprietary funds operating statement and $600,000 loss in the government-wide statement of activities. c
Topic: Capital assets in the reconciliation of government-wide and funds statements LO 3, 5 If the equipment is reported in the general fund, what amount is included in the fiscal 2024 reconciliation of the change in fund balances of governmental funds to the change in net position of governmental activities, related to this equipment? a. b. c. d.
Subtract $4,000,000. Subtract $800,000. Add $3,200,000. Add $4,000,000.
ANS:
c +$4,000,000 – ($4,000,000/5) = $3,200,000.
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-29
81.
82.
Topic: Capital assets in the reconciliation of government-wide and funds statements LO 3, 5 If the equipment is reported in the general fund, what amount is subtracted in the fiscal 2025 reconciliation of the change in fund balances of governmental funds to the change in net position of governmental activities, related to this equipment? a. b. c. d.
$3,200,000 $2,400,000 $1,800,000 $ 600,000
ANS:
a On a full accrual basis, depreciation expense is $4,000,000/5 = $800,000. Book value of equipment when sold= $4,000,000 – (2 x $800,000) = $2,400,000, and the loss on disposal = $2,400,000 - $1,800,000 = $600,000. Therefore, full accrual income is reduced by $800,000 + $600,000 = $1,400,000. The general fund records no depreciation and adds $1,800,000 to fund balance for the proceeds from the sale. The reconciliation from +$1,800,000 to -$1,400,000 is $(3,200,000).
Topic: Infrastructure in the government-wide financial statements LO 5 A county owns many roads, bridges, and other infrastructure. If this infrastructure is well maintained, the government may report depreciation on the infrastructure a. b.
using the straight-line method on the government-wide statement of activities. at an amount equal to the year’s maintenance costs on the government-wide statement of activities. using the straight-line method on the governmental funds operating statement. at an amount equal to the year’s maintenance costs on the governmental funds operating statement.
c. d. ANS: 83.
b
Topic: Infrastructure in the government-wide financial statements LO 5 A city has roads that it constructed several years ago for $20,000,000, with a remaining life of 20 years. This year it incurred $800,000 to maintain the roads. How much depreciation should the city report for the roads in its government-wide statement of activities if it uses the modified approach, versus if it does not use the modified approach?
a. b. c. d.
Modified Approach $ 0 $ 0 $1,000,000 $ 800,000
ANS:
Not the Modified Approach $1,000,000 $ 800,000 $ 800,000 $1,000,000
d
© Cambridge Business Publishers, 2023 12-30
Advanced Accounting, 5th Edition
84.
Topic: Derivatives investments in the ACFR LO 5 In a state’s ACFR, unrealized gains on derivative investments held as hedges by the general fund and an enterprise fund are reported a.
d.
on the proprietary funds statement of net position and the government-wide statement of net position. on the proprietary funds statement of net position only. on the proprietary funds operating statement and the government-wide statement of activities. on the proprietary funds operating statement only.
ANS:
a
b. c.
85.
Topic: Investments in the government-wide statements LO 5 Securities investments of a state or local government are reported at fair value in the government-wide statement of net position a. b. c. d.
only if they are derivative investments classified as qualified hedges. only if they are investments that are hedged by derivative investments. only if they are investments held by proprietary funds. for all investments held by governmental and proprietary funds.
ANS:
d
Use the following information to answer Questions 86 and 87 below: On April 1, 2023, a county issued $10,000,000 in variable rate debt, with interest paid on March 31 of each year, the county’s fiscal year-end. The variable rate is adjusted at the beginning of each year. The variable rate for fiscal 2024 was 2.9%. On the same date, the county entered a receive variable/pay fixed interest rate swap, where the county pays a 3.1% fixed rate to a counterparty. The swap qualifies for hedge accounting. At the end of fiscal 2024, the variable rate is reset to 3.2% and the swap has a positive value of $50,000. By the end of fiscal 2025, the variable rate is reset to 3.15%, and the swap has a positive value of $30,000. 86.
Topic: Hedging derivatives in the government-wide financial statements LO 5 The $50,000 unrealized gain on the derivatives investment appears on the county’s fiscal 2024 government-wide statements as a. b. c. d.
a deferred outflow on the government-wide statement of net position. a deferred inflow on the government-wide statement of net position. an unrealized gain on the government-wide statement of activities. a liability on the government-wide statement of net position.
ANS:
b
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-31
87.
88.
Topic: Hedging derivatives in the government-wide financial statements LO 5 At the beginning of fiscal 2026, the county decides the swap no longer qualifies for hedge accounting. The adjusting entry results in a. b. c. d.
a write-off of the derivatives investment, in the amount of $30,000. an increase in deferred inflows of resources, in the amount of $30,000. a $30,000 loss, reported on the government-wide statement of activities. a $30,000 gain, reported on the government-wide statement of activities.
ANS:
d
Topic: Defined benefit pension and OPEB plans LO 5 The pension and OPEB liability reported on the governmental funds balance sheet is equal to a. b. c. d. ANS:
89.
the actuarial liability for payments related to past service. the total actuarial liability for payments related to past service periods, less the net position of the pension and OPEB plans. the expected future payments to be funded by available financial resources. the difference between the annual required contributions to the pension and OPEB trust funds and the government’s actual contributions. c
Topic: Defined benefit pension and OPEB plans LO 5 The pension and OPEB liability reported in the government-wide statement of net position is equal to a. b. c. d. ANS:
the actuarial liability for payments related to past service. the total actuarial liability for payments related to past service periods, less the net position of the pension and OPEB plans. the expected future payments to be funded by available financial resources. the difference between the annual required contributions to the pension and OPEB trust funds and the government’s actual contributions. b
© Cambridge Business Publishers, 2023 12-32
Advanced Accounting, 5th Edition
90.
Topic: Defined benefit pension and OPEB plans LO 5 Increases in a government’s pension and OPEB liability that are due to benefits earned in the current year are reported in a. b.
91.
c. d.
Deferred inflows on the government-wide statement of net position. Pension and OPEB liability on the pension and OPEB trust fund’s statement of net position. Pension and OPEB expense on the government-wide statement of activities. Deferred outflows of resources on the government-wide statement of net position.
ANS:
c
Topic: Defined benefit pension and OPEB plans LO 5 Increases in a government’s pension and OPEB liability that are due to changes in economic or demographic assumptions or actual results that are different from expected results, are reported in a. b. c. d.
Deferred inflows of resources on the government-wide statement of net position. Pension and OPEB liability on the pension and OPEB trust fund’s statement of net position. Pension and OPEB expense on the government-wide statement of activities. Deferred outflows of resources on the government-wide statement of net position.
ANS:
d
Use the following information to answer Questions 92 – 94. A county reports its defined benefit pensions for employees of governmental and proprietary funds on the government-wide financial statements. Here is information for fiscal 2024. • • • • 92.
The total pension liability, measured at the end of fiscal 2024, is $100,000,000, while the total pension liability, measured at the end of fiscal 2023, is $85,000,000. The net increase in deferred outflows related to pensions was $2,000,000, while deferred outflows released to pension expense were $300,000. The net increase in deferred inflows related to pensions was $150,000, while deferred inflows released to pension expense were $20,000. The county transferred $5,000,000 in cash to the pension trust fund.
Topic: Defined benefit pension plans LO 5 The $300,000 in deferred outflows released during the year a. b. c. d.
Add to pension expense for fiscal 2024. Add to pension expense for fiscal 2025. Reduce pension expense for fiscal 2024. Reduce pension expense for fiscal 2025.
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-33
ANS: 93.
94.
a
Topic: Defined benefit pension plans LO 5 The $20,000 in deferred inflows released during the year a. b. c. d.
Add to pension expense for fiscal 2024. Add to pension expense for fiscal 2025. Reduce pension expense for fiscal 2024. Reduce pension expense for fiscal 2025.
ANS:
c
Topic: Defined benefit pension plans LO 5 Pension expense reported in the fiscal 2024 government-wide statement of activities is a. b. c. d.
$15,000,000. $18,150,000. $23,150,000. $21,850,000.
ANS:
b $18,150,000 = $300,000 - $20,000 + $17,870,000.
Notes for Questions 92 – 94: Entries are: Deferred outflows—pensions Pension liability Increases qualifying for deferral.
2,300,000 2,300,000
Pension expense Deferred outflows—pensions Amortization of deferrals.
300,000
Pension liability Deferred inflows—pensions Increases qualifying for deferral.
170,000
Deferred inflows—pensions Pension expense Amortization of deferrals.
20,000
© Cambridge Business Publishers, 2023 12-34
300,000
170,000
20,000
Advanced Accounting, 5th Edition
Pension liability Cash Payment to pension trust fund.
5,000,000 5,000,000
Pension expense 17,870,000 Pension liability 17,870,000 To adjust the pension liability to its end-of-year value; $17,870,000 = $100,000,000 – ($85,000,000 + $2,300,000 - $170,000 - $5,000,000). 95.
Topic: Defined benefit OPEB plans LO 5 A county’s enterprise fund reports OPEB expenses of $800,000 in its operating statement and an OPEB noncurrent liability of $6,000,000 on its statement of net position. All of the OPEB amounts relate to current employees who are not yet receiving these benefits. How is this information reported on the government-wide financial statements? a.
d.
$800,000 expense in the statement of activities, $800,000 noncurrent liability on the statement of net position. $800,000 expense in the statement of activities, $6,000,000 noncurrent liability on the statement of net position. $6,000,000 expense in the statement of activities, $6,000,000 noncurrent liability on the statement of net position. Not reported
ANS:
b
b. c.
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-35
PROBLEMS 1.
Topic: Government-wide statement of net position LO 2 A county reports the following balances at its fiscal year-end, using full accrual accounting: Governmental Business-type activities activities Assets Cash and cash equivalents $ 50,000 $ 7,000 Receivables, net 10,500 4,500 Due from governmental funds -3,000 Due from other governmental funds 400 -Inventories 1,000 800 Capital assets, net 225,000 85,000 Deferred outflows of resources 8,000 3,000 Liabilities Accounts payable 5,000 300 Due to other governmental funds 400 -Due to enterprise funds 3,000 -Accrued interest payable 1,500 700 Noncurrent liabilities 185,000 45,000 Deferred inflows of resources 500 3,200 Additional information: 1. 2. 3.
$100,000 of noncurrent liabilities for governmental activities were used to acquire capital assets. All of the noncurrent liabilities for business-type activities were used to acquire capital assets. The net position of governmental activities has external restrictions totaling $25,000. The net position of business-type activities has external restrictions totaling $18,000.
Required Prepare the county’s government-wide statement of net position as of its fiscal year-end.
© Cambridge Business Publishers, 2023 12-36
Advanced Accounting, 5th Edition
ANS:
Statement of Net Position At Fiscal Year-End Governmental Activities
Assets Cash and cash equivalents Receivables, net Internal balances Inventories Capital assets, net Total assets Deferred outflows of resources Liabilities Accounts payable Accrued interest payable Noncurrent liabilities Total liabilities Deferred inflows of resources Net position Net investment in capital assets (1) Restricted Unrestricted Total net position (1)
$
50,000 10,500 (3,000) 1,000 225,000 283,500
Business-Type Activities $
Total
7,000 4,500 3,000 800 85,000 100,300
$ 57,000 15,000 -1,800 310,000 383,800
8,000
3,000
11,000
5,000 1,500 185,000 191,500
300 700 45,000 46,000
5,300 2,200 230,000 237,500
500
3,200
3,700
125,000 25,000 (50,500) $ 99,500
40,000 18,000 (3,900) $ 54,100
165,000 43,000 (54,400) $ 153,600
$225,000 - $100,000 = $125,000 $85,000 - $45,000 = $40,000
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-37
2.
Topic: Government-wide statement of activities LO 2 A county has a general fund, several special revenue funds, and a water utility reported in an enterprise fund. Below is information for the current fiscal year: Property tax revenues Sales tax revenues Unrestricted investment income General government expenses Public safety expenses Education expenses Transportation expenses General government charges for services Public safety charges for services Education grants received Water utility expenses Water utility charges for services Net position—governmental activities, beginning Net position—business-type activities, beginning
$60,000 5,000 800 15,000 35,000 25,000 1,000 2,000 7,000 600 14,000 16,000 10,000 20,000
Required Prepare the county’s government-wide statement of activities for the fiscal year, in good form.
© Cambridge Business Publishers, 2023 12-38
Advanced Accounting, 5th Edition
ANS:
Program Revenues Functions/ Programs
Expenses
Charges for services
$ 15,000
$ 2,000
Public safety
35,000
Education
Grants & contributions
Net (Expense) Revenue and Changes in Net Position BusinessGovernmental type activities activities Total
Governmental activities: General government
$
--
$(13,000)
7,000
--
25,000
--
Transportation
1,000
Total governmental activities
$
--
$ (13,000)
(28,000)
--
(28,000)
600
(24,400)
--
(24,400)
--
--
(1,000)
--
(1,000)
76,000
9,000
600
(66,400)
--
(66,400)
14,000
16,000
--
--
2,000
2,000
$ 90,000
$ 25,000
$ 600
$(66,400)
$ 2,000
$(64,400)
Property taxes
60,000
--
60,000
Sales taxes
5,000
--
5,000
800
--
800
65,800
--
65,800
Change in net position
(600)
2,000
1,400
Net position, beginning
10,000
20,000
30,000
9,400
$ 22,000
$ 31,400
Business-type activities: Water utility Total primary government
General revenues:
Investment income Total general revenues
Net position, ending
Test Bank, Chapter 12
$
© Cambridge Business Publishers, 2023 12-39
3.
Topic: Government-wide statement of activities LO 2 A county has a general fund, special revenue funds, and a sewer service, reported in an enterprise fund. Below is information for the current fiscal year: Property tax revenues Sales tax revenues Unrestricted investment income General government expenses Public safety expenses General government charges for services Public safety charges for services Public safety grants received Sewer expenses Sewer charges for services Net position—governmental activities, beginning Net position—business-type activities, beginning
$80,000 44,000 2,800 107,000 35,000 12,000 3,000 500 24,000 25,500 4,000 9,000
Required Questions below relate to information found on the county’s government-wide statement of activities for the current fiscal year. Calculate the following amounts: a. b. c. d. e.
Total expenses of governmental activities Net expenses of governmental activities Total general revenues Ending net position, governmental activities Ending net position, business-type activities
ANS: a. b. c. d. e.
$107,000 + $35,000 = $142,000 $142,000 - $12,000 - $3,000 - $500 = $126,500 $80,000 + $44,000 + $2,800 = $126,800 $4,000 + $126,800 - $126,500 = $4,300 $9,000 + $25,500 - $24,000 = $10,500
© Cambridge Business Publishers, 2023 12-40
Advanced Accounting, 5th Edition
Statement of activities, backup for Question 3. Program Revenues Functions/ Programs
Expenses
Charges for services
$ 107,000
$ 12,000
Public safety
35,000
Total governmental activities
Grants & contributions
Net (Expense) Revenue and Changes in Net Position BusinessGovernmental type activities activities Total
Governmental activities: General government
$
--
$ (95,000)
3,000
500
142,000
15,000
24,000 $ 166,000
$
--
$ (95,000)
(31,500)
--
(31,500)
500
(126,500)
--
(126,500)
25,500
--
--
1,500
1,500
$ 40,500
$ 500
$(126,500)
$ 1,500
$(125,000)
Property taxes
80,000
--
80,000
Sales taxes
44,000
--
44,000
Investment income
2,800
--
2,800
126,800
--
126,800
Change in net position
300
1,500
1,800
Net position, beginning
4,000
9,000
13,000
4,300
$ 10,500
$ 14,800
Business-type activities: Sewer Total primary government
General revenues:
Total general revenues
Net position, ending
Test Bank, Chapter 12
$
© Cambridge Business Publishers, 2023 12-41
4.
Topic: Government-wide statement of activities LO 2 A county has the following governmental and business-type activity categories: Governmental activities: General government Education Transportation Interest on long-term debt Business-type activities: Water and sewer The following information was obtained from the financial records of the county for the current fiscal year: Net position-governmental activities, beginning Net position-business-type activities, beginning Expenses: General government Education Transportation Interest on long-term debt Water and sewer Grants and contracts received: Education Transportation Charges for services: General government Education Transportation Water and sewer Property tax revenue Sales tax revenue Unrestricted investment income—governmental activities Unrestricted investment income—business-type activities
$
(1,000) 34,000 45,200 47,300 3,700 4,200 11,800 1,750 100 3,700 4,700 3,500 12,050 62,500 24,500 400 160
Required Prepare, in good form, the county’s government-wide statement of activities for the fiscal year.
© Cambridge Business Publishers, 2023 12-42
Advanced Accounting, 5th Edition
ANS: Program Revenues Functions/ Programs
Expenses
Charges for services
$ 45,200
$ 3,700
Education
47,300
Transportation
Grants & contracts
Net (Expense) Revenue and Changes in Net Position BusinessGovernmental type activities activities Total
Governmental activities: General government
$
--
$(41,500)
$
--
$ (41,500)
4,700
1,750
(40,850)
(40,850)
3,700
3,500
100
(100)
(100)
Interest on LT debt
4,200
--
--
(4,200)
--
(4,200)
Total governmental activities
100,400
11,900
1,850
(86,650)
--
(86,650)
11,800
12,050
--
--
250
250
11,800
12,050
--
--
250
250
$112,200
$ 23,950
$1,850
(86,650)
250
(86,400)
Property taxes
62,500
--
62,500
Sales taxes
24,500
--
24,500
Unrestricted investment income
400
160
560
Total general revenues
87,400
160
87,560
Change in net position
750
410
1,160
Net position, beginning
(1,000)
34,000
33,000
(250)
$ 34,410
$ 34,160
Business-type activities: Water Total business-type activities Total primary government
General revenues:
Net position, ending
Test Bank, Chapter 12
$
© Cambridge Business Publishers, 2023 12-43
5.
Topic: Government-wide statement of net position, pension reporting LO 2, 5 A county reports the following balances at its fiscal year-end, using full accrual accounting:
Assets Cash and cash equivalents Receivables, net Due from other governmental funds Due from other governments Inventories Capital assets, net Assessments receivable Deferred outflows of resources: pensions Liabilities Operating payables Due to other governmental funds Due to other governments Current portion of long-term capital liabilities Current portion of compensated absences payable Unearned revenue Landfill closure postclosure liability Noncurrent portion of long-term capital liabilities Noncurrent portion of compensated absences payable Noncurrent portion of net pension and OPEB liability Deferred inflows of resources: pension deferrals
Governmental activities
Business-type activities
$ 44,100 2,500 200 1,550 1,200 92,200 3,800 11,800
$ 9,700 19,300
5,000 200 185 800 2,750 315 -9,800 920 37,030 2,350
300
--20,300 -200
--140 -9,600 -50 1,020 5
Additional information: 1. 2.
The net position of governmental activities has the following restrictions: general government, $850; public health and safety, $12,800; capital projects, $5,800, and debt service $5,300. Business-type activities consist of a solid waste facility. There are no restrictions on the facility’s net position.
Required a. Calculate total assets of governmental activities at fiscal year-end. b. Calculate total net position of governmental activities and business-type activities at fiscal year-end. c. Prepare the net position section of the government-wide statement of net position at fiscal year-end, in good form. d. The county reports deferred inflows and also deferred outflows related to pensions. Explain the nature of each balance and its treatment in future years.
© Cambridge Business Publishers, 2023 12-44
Advanced Accounting, 5th Edition
ANS: a. b.
$44,100 + $2,500 + $1,550 + $1,200 + $92,200 + $3,800 = $145,350. Note: Due from other governmental funds is omitted. Governmental activities: $145,350 + $11,800 – ($5,000 + $185 + $800 + $2,750 + $315 + $9,800 + $920 + $37,030 + $2,350) = $98,000. Business-type activities: $9,700 + $19,300 + $20,300 + $200 – ($300 + $140 + $9,600 + $50 + $1,020 + $5) = $38,385. Note: Due to other governmental funds is omitted from liabilities, and deferred outflows and inflows are included in the calculation of net position.
c.
Net position Net investment in capital assets Restricted for: General government Public health and safety Capital projects Debt service Unrestricted (deficit) Total net position
Governmental activities
Business-type activities
$81,600
$20,300
$101,900
850 12,800 5,800 5,300 (8,350) $98,000
----18,085 $38,385
850 12,800 5,800 5,300 9,735 $136,385
Total
Net investment in capital assets, governmental activities = $92,200 - $800 - $9,800 = $81,600. d.
The deferred amounts for pensions are increases (outflows) and decreases (inflows) in estimated pension liabilities due to changes in economic or demographic assumptions, or to differences between expected and actual results. The deferred accounts are written off systematically to pension expense over time. Write-offs of deferred outflows will increase future pension expense and write-offs of deferred inflows will decrease future pension expense.
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-45
6.
Topic: Information appearing on government-wide and funds statements of net position/balance sheets LO 2, 3, 5 Listed below are financial statements found in a county’s ACFR: 1. 2. 3. 4.
Government-wide statement: statement of net position Fund statement: balance sheet—governmental funds Fund statement: statement of net position—proprietary funds Fund statement: statement of fiduciary net position
Required On which balance sheet(s) would each of the following accounts appear? Identify the financial statement(s) by number. The account may appear on one or more or none of the statements. If the account is not reported on any of the above financial statements, your answer is N/A. a. b. c. d. e. f. g. h. i. j.
Buildings, net of accumulated depreciation (enterprise fund) Investments of an investment trust Lease obligations, general fund Equipment, net of accumulated depreciation, for capital projects fund Accrued salaries and wages, general fund Cash held from sales tax collections belonging to the state Unrealized losses on enterprise fund derivative investments (hedges) Long-term pension liability for enterprise fund Long-term pension liability for general fund Deferred outflows of resources: bond refunding (general fund)
ANS: a. b. c. d. e. f. g. h. i. j.
1, 3 4 1 1 1, 2 4 1, 3 1, 3 1 1
© Cambridge Business Publishers, 2023 12-46
Advanced Accounting, 5th Edition
7.
Topic: Information appearing on government-wide and funds statements of net position/balance sheets LO 2, 3, 5 Listed below are balance sheets found in a state’s ACFR: 1. 2. 3. 4.
Government-wide statement: statement of net position Fund statement: balance sheet—governmental funds Fund statement: statement of net position—proprietary funds Fund statement: statement of fiduciary net position
Required On which balance sheet(s) would each of the following accounts appear? Identify the financial statement(s) by number. The account may appear on one or more or none of the financial statements. If the account is not reported on any of the above financial statements, your answer is N/A. a. b. c. d. e. f. g. h. i. j.
Due from business-type activities to governmental activities Due from other governments to governmental funds Due from capital projects fund to general fund Sales taxes due to other governments Lottery ticket sales for the year Net position held in trust for 529 college savings plans Collections of sales taxes from businesses for the year Cash and investments, permanent fund Deferred outflows for pensions, enterprise fund Cash and investments, pension and OPEB trust fund
ANS: a. b. c. d. e. f. g. h. i. j.
1 1, 2 2 4 N/A 4 N/A 1, 2 1, 3 4
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-47
8.
Topic: Information appearing on government-wide and funds operating statements LO 2, 3, 5 Listed below are operating statements found in a county’s ACFR: 1. 2. 3. 4.
Government-wide statement: Statement of activities Fund statement: Statement of revenues, expenditures, and changes in fund balances— governmental funds Fund statement: Statement of revenues, expenses, and changes in net position— proprietary funds Fund statement: Statement of changes in fiduciary net position
Required On which statement(s) would each of the following accounts appear? Identify the financial statement(s) by number. The account may appear on one statement or more than one statement, or none of the operating statements. If the account is not reported on any of the above statements, your answer is N/A. a. b. c. d. e. f. g. h. i. j.
Depreciation expense for permanent fund capital assets Depreciation expense for internal service fund capital assets Proceeds from issuing general obligation bonds to finance capital projects Supplies used by general administration employees Gain on sale of general fund capital assets Changes in fair value of enterprise fund investments Interest payments—general obligation debt Unrealized gains on investment trust fund investments held for income Unrealized gains on capital projects fund investments held for income Unrealized gains on enterprise fund derivatives investments used as hedges
ANS: a. b. c. d. e. f. g. h. i. j.
1 1, 3 2 1, 2 1 1, 3 1, 2 4 1, 2 N/A
© Cambridge Business Publishers, 2023 12-48
Advanced Accounting, 5th Edition
9.
Topic: Information appearing on government-wide and funds operating statements LO 2, 3, 5 Listed below are operating statements found in a county’s ACFR: 1. 2. 3. 4.
Government-wide statement: Statement of activities Fund statement: Statement of revenues, expenditures, and changes in fund balances— governmental funds Fund statement: Statement of revenues, expenses, and changes in net position— proprietary funds Fund statement: Statement of changes in fiduciary net position
Required On which statement(s) would each of the following accounts appear? Identify the financial statement(s) by number. The account may appear on one statement or more than one statement, or none of the operating statements. If the account is not reported on any of the above statements, your answer is N/A. a. b. c. d. e. f. g. h. i. j.
Change in net position Deductions: distributions of sales taxes to towns Inventories Expenses for water and sewer services (enterprise fund) Proceeds from sale of equipment (general fund) Changes in fair value of income investments Additions: employer contributions to pension plans Deferred inflows: derivatives Change in pension liability due to change in assumptions Increase in expected present value of asset retirement obligation (enterprise fund)
ANS: a. b. c. d. e. f. g. h. i. j.
1, 3, 4 4 N/A 1, 3 2 1, 2, 3, 4 4 N/A N/A N/A
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-49
10.
Topic: Information appearing on government-wide and funds statements LO 2, 3 Here are financial statements shown in a city’s ACFR: 1. 2. 3. 4. 5. 6. 7. 8.
Government-wide statement: Statement of net position Government-wide statement: Statement of activities Fund statement: Balance sheet—Governmental funds Fund statement: Statement of revenues, expenditures and changes in fund balances— Governmental funds Fund statement: Statement of net position—Proprietary funds Fund statement: Statement of revenues, expenses, and changes in net position— Proprietary funds Fund statement: Statement of fiduciary net position Fund statement: Statement of changes in fiduciary net position
Required For each of the following account titles related to the financial performance of the city, indicate, by statement number, on which of the above eight statements the account appears. The account may be reported on one statement or more than one statement. a. b. c d. e. f. g. h. i. j.
Nonspendable fund balance, general fund Accounts payable, special revenue fund Cash and cash equivalents, custodial fund Debt service: principal payments, debt service fund Proceeds of debt issuance, capital projects fund Machinery and equipment, proprietary funds Depreciation expense, proprietary funds Investment earnings, private purpose trust fund Depreciation expense, general fund Change in net position, pension and OPEB trust fund
_____ _____ _____ _____ _____ _____ _____ _____ _____ _____
ANS: a. b. c. d. e. f. g. h. i. j.
3 1, 3 7 4 4 1, 5 2, 6 8 2 8
© Cambridge Business Publishers, 2023 12-50
Advanced Accounting, 5th Edition
11.
Topic: Information appearing in the government-wide and fund statements LO 2, 3, 5 Here are financial statements found in a city’s ACFR: 1. 2. 3. 4. 5. 6. 7. 8.
Government-wide statement: Statement of net position Government-wide statement: Statement of activities Fund statement: Balance sheet–governmental funds Fund statement: Statement of revenues, expenditures and changes in fund balances– governmental funds Fund statement: Statement of net position–proprietary funds Fund statement: Statement of revenues, expenses and changes in net position– proprietary funds Fund statement: Statement of fiduciary net position Fund statement: Statement of changes in fiduciary net position
Required For each of the following accounts related to the financial performance of the city, indicate, by number, on which of the above financial statements the item is reported. The account may be reported on one statement, more than one statement, or none of the statements. If the item is not reported on any of the above statements, your answer is N/A. a. b. c. d. e. f. g. h. i. j.
Fund balance, committed Sales taxes due to the state Investments held by proprietary funds Debt service: principal payments Investments held by custodial funds Unrealized gains on income investments held by proprietary funds Unrealized gains on hedging investments held by proprietary funds General obligation bonds payable Investment in capital assets, net of related debt Additions: collection of sales taxes due to the state
ANS: a. b. c. d. e. f. g. h. i. j.
3 7 1, 5 4 7 2, 6 1, 5 1 1, 5 8
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-51
12.
Topic: Information appearing on the government-wide and funds statements LO 2, 3, 5 Here are government-wide and funds statements for governmental and proprietary funds for a state: 1. 2. 3. 4. 5. 6.
Government-wide statement of net position Government-wide statement of activities Governmental funds balance sheet Governmental funds statement of revenues, expenditures, and changes in fund balances Proprietary funds statement of net position Proprietary funds statement of revenues, expenses, and changes in net position
Required For each of the following account titles reported in the financial statements, indicate on which of the above six financial statements the item is reported. The account balance may be reported on one statement, more than one statement, or none of the statements. Indicate the number(s) of the statement(s) next to each item. If the item is not reported on any of the above statements, write N/A next to the item. a. b. c. d. e. f. g. h. i. j.
Fund balance—unassigned Depreciation expense— state lottery (enterprise fund) Investments, pension and OPEB trust fund Cash and cash equivalents, debt service fund Amortization expense, general fund Proceeds from the sale of capital assets, general fund Noncurrent liabilities, lease obligations (enterprise fund) Restricted net position Deferred outflows—pensions Deductions: administrative expense (private purpose trust)
_______ _______ _______ _______ _______ _______ _______ _______ _______ _______
ANS: a. b. c. d. e. f. g. h. i. j.
3 2, 6 N/A 1, 3 2 4 1, 5 1, 5 1, 5 N/A
© Cambridge Business Publishers, 2023 12-52
Advanced Accounting, 5th Edition
13.
Topic: Information appearing on the government-wide and funds statements LO 2, 3 Here are some of the financial statements required in the ACFR for the State of Rhode Island: 1. 2. 3. 4. 5. 6. 7. 8.
Government-wide statement: Statement of net position Government-wide statement: Statement of activities Fund statement: Balance sheet–Governmental funds Fund statement: Statement of revenues, expenditures and changes in fund balances– Governmental funds Fund statement: Statement of net position–Proprietary funds Fund statement: Statement of revenues, expenses and changes in net position– Proprietary funds Fund statement: Statement of fiduciary net position Fund statement: Statement of changes in fiduciary net position
For each of the following accounts related to the financial performance of the State of Rhode Island, indicate on which of the above financial statements the account is reported. The account may appear on one statement, more than one statement, or none of the statements. Indicate the number(s) of the statement(s) next to each account title. If the item is not reported on any of the above statements, write N/A in the space. a. b. c. d. e. f. g. h. i. j.
Administrative expenses, pension trust fund Gain on sale of capital assets, internal service fund Total expenses of governmental activities Investments of the investment trust fund Proceeds from general obligation bond issues Taxes receivable, general fund Net investment in capital assets, governmental activities Long-term bonds payable, enterprise funds Assigned fund balance Investment income, investment trust fund
ANS: a. b. c. d. e. f. g. h. i. j.
8 2, 6 2 7 4 1, 3 1 1, 5 3 8
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-53
14.
Government-wide statements: Interfund debt LO 2 Below are a county’s interfund balances on hand at the end of the fiscal year. 1. 2. 3. 4. 5. 6. 7. 8.
$10,000 due from an internal service fund to the pension trust fund. $3,000 due from an enterprise fund to the general fund. $2,000 due from an internal service fund to the general fund. $40,000 due from an enterprise fund to the pension trust fund. $20,000 due from a special revenue fund to the general fund. $10,000 due from one enterprise fund to another enterprise fund. $3,000 due from a special revenue fund to an internal service fund. $12,000 due from an internal service fund to an enterprise service fund.
Required Show how the information above is reported in the government-wide statement of net position. ANS: Amounts owed between governmental and business-type activities are netted and reported as internal balances either owed from governmental to business-type activities or vice versa. Amounts owed from/to fiduciary funds are external balances, since fiduciary funds do not appear in the government-wide statements. 1. 2. 3. 4. 5. 6. 7. 8.
Reported as an external balance with a fiduciary fund. Reported as an internal balance between governmental and business-type activities. Not reported. Reported as an external balance with a fiduciary fund. Not reported. Not reported. Not reported. Reported as an internal balance between governmental and business-type activities.
The two internal balances 2. and 8. are: Governmental activities Business-type activities Receivable $ 3,000 Payable $ (3,000) Payable (12,000) Receivable 12,000 Net payable $ (9,000) Net receivable $ 9,000 Items 1. and 4. are external balances, reported as liabilities. Amounts reported on the government-wide Statement of Net Position:
Assets Internal balances Liabilities Liability to pension fund
© Cambridge Business Publishers, 2023 12-54
Governmental Activities
Business-type Activities
$(9,000)
$ 9,000
10,000
40,000
Advanced Accounting, 5th Edition
15.
Topic: Reconciliation of fund balances to net position LO 3 The following information is available concerning the financial activities of a city for its fiscal year. The city uses the purchases method for inventory, and its landfill is a governmental fund. Total fund balances—governmental funds, end of fiscal year Net pension liability—governmental funds OPEB liability—proprietary funds Inventories—governmental funds Lease obligations—governmental funds Long-term bonds and notes payable—governmental funds Capital assets, net of accumulated depreciation—governmental funds Net position—fiduciary funds Deferred outflows of resources: bond refunding—governmental funds Deferred inflows of resources: pensions—governmental funds OPEB liability—governmental funds Accrued noncurrent vacation and sick leave—governmental funds Accrued interest payable—governmental funds Landfill closure and post-closure care liability—governmental funds Net position—custodial funds Capital assets, net of accumulated depreciation—proprietary funds
$
3,500 65,000 100 400 1,600 90,000 55,000 200,000 14,000 1,800 95,000 4,500 1,000 1,500 150 10,600
Required Prepare a schedule showing a reconciliation of total fund balances–governmental funds (reported on the governmental funds balance sheet) to net position–governmental activities (reported on the government-wide statement of net position). Not all the information provided is used in this reconciliation. ANS: Total fund balances—governmental funds Plus inventories—governmental funds Plus capital assets, net of accumulated depreciation—governmental funds Plus deferred outflows of resources: bond refunding—governmental funds Less long-term bonds and notes payable—governmental funds Less OPEB liability—governmental funds Less accrued noncurrent vacation and sick leave—governmental funds Less accrued interest payable—governmental funds Less landfill closure and post-closure care liability—governmental funds Less net pension liability—governmental funds Less deferred inflows of resources: pensions—governmental funds Less lease obligations—governmental funds Net position (deficit)—governmental activities
Test Bank, Chapter 12
$
3,500 400 55,000 14,000 (90,000) (95,000) (4,500) (1,000) (1,500) (65,000) (1,800) (1,600) $ (187,500)
© Cambridge Business Publishers, 2023 12-55
16.
Topic: Reconciliation of fund balances to net position LO 3 The following information is taken from a city’s ACFR for the current fiscal year. Total fund balances–governmental funds Net position of internal service funds Accrued noncurrent vacation and sick leave of governmental funds OPEB obligation of governmental funds Long-term liabilities of proprietary funds Capital assets, less accumulated depreciation, of governmental funds Net pension liability, governmental funds Bonds payable, at par, governmental funds Taxes receivable not a source of current resources, governmental funds Capital assets, less accumulated depreciation, of proprietary funds Accrued interest payable, governmental funds Unamortized bond discounts, governmental funds Unamortized bond premiums, governmental funds Deferred outflows of resources: bond refunding, governmental funds Deferred inflows of resources: bond refunding, governmental funds
$ 185,000 6,000 25,000 200,000 800,000 1,600,000 600,000 250,000 10,000 1,200,000 8,000 500 4,000 18,000 800
Required Prepare a schedule showing the reconciliation of total fund balances–governmental funds (as reported on the governmental funds balance sheet) to the net position–governmental activities (as reported on the government-wide statement of net position). Not all the information items above are needed to do this reconciliation. ANS: Total fund balances–governmental funds Plus net position of internal service funds Plus capital assets, less accumulated depreciation, of governmental funds Plus taxes receivable not a source of current resources, governmental funds Less accrued noncurrent vacation and sick leave of governmental funds Less OPEB obligation of governmental funds Less net pension liability, governmental funds Less accrued interest payable, governmental funds Plus deferred outflows of resources: bond refunding, governmental funds Less deferred inflows of resources: bond refunding, governmental funds Plus unamortized bond discounts, governmental funds Less unamortized bond premiums, governmental funds Less bonds payable, at par, governmental funds Net position–governmental activities
© Cambridge Business Publishers, 2023 12-56
$ 185,000 6,000 1,600,000 10,000 (25,000) (200,000) (600,000) (8,000) 18,000 (800) 500 (4,000) (250,000) $ 731,700
Advanced Accounting, 5th Edition
17.
Topic: Reconciliation of change in fund balances to change in net position LO 3 The following information is taken from a city’s ACFR for the current fiscal year. Net change in fund balances–total governmental funds Principal retirement of general obligation bonds Investment in derivative contracts, fiduciary funds Increase in net position of internal service funds Revenues reported using full accrual basis but not providing current resources, governmental funds Interest income, fiduciary funds Depreciation expense, governmental fund assets Accrued proprietary funds revenues not providing current resources Pension and OPEB expense not requiring current financial resources, governmental funds Other expenditures in excess of expenses, governmental funds Depreciation and amortization expense, enterprise fund assets General obligation bonds issued Amortization of deferred inflows: pensions and OPEB, governmental funds Pension and OPEB expense not requiring current resources, proprietary funds Amortization of deferred outflows: bond refunding, governmental funds Capital outlay, governmental funds Lease principal payments, governmental funds
$ 300,000 250,000 125,000 6,000 12,600 76,000 140,000 1,200 360,000 1,100 198,000 400,000 235,000 17,000 200 150,000 29,000
Required Prepare a schedule showing the reconciliation of the change in fund balances–governmental funds (as reported on the governmental funds balance sheet) to the change in net position of governmental activities (as reported on the government-wide statement of net position) for the city. Not all the information items above are needed to do this reconciliation. ANS: Net change in fund balances–total governmental funds Plus capital outlay, governmental fund assets Less depreciation expense, governmental fund assets Plus revenues reported using full accrual basis but not providing current resources, governmental funds Less general obligation bonds issued Plus principal retirement on general obligation bonds Plus lease principal payments, governmental funds Plus other expenditures in excess of expenses, governmental funds Less pension and OPEB expense not requiring current financial resources, governmental funds Plus amortization of deferred inflows: pensions, governmental funds Less amortization of deferred outflows: bond refunding, governmental funds Plus increase in net position of internal service funds Change in net position of governmental activities
Test Bank, Chapter 12
$ 300,000 150,000 (140,000) 12,600 (400,000) 250,000 29,000 1,100 (360,000) 235,000 (200) 6,000 $ 83,500
© Cambridge Business Publishers, 2023 12-57
18.
Topic: Reconciliation of change in fund balances to change in net position LO 3 The following information is available concerning the financial activities of a county for the current fiscal year: Change in total fund balances–governmental funds Gain on sale of internal service capital assets Depreciation expense on general capital assets Capital outlays–governmental funds Capital outlays–internal service funds Capital outlays—enterprise funds Change in net position–fiduciary funds Change in net position–internal service funds Loss on sale of enterprise fund capital assets Gain on sale of general capital assets Repayments of principal on general long-term debt Proceeds from issuance of general long-term debt Proceeds from sale of general capital assets Other expenditures of governmental funds in excess of expenses, excluding depreciation Expenses of internal service funds, other than depreciation, not requiring current financial resources
$360,000 25,000 65,000 200,000 30,000 8,000 25,000 1,000 3,000 500 45,000 338,000 22,000 3,000 2,000
Required Prepare a schedule showing the reconciliation of the change in total fund balances– governmental funds (as reported on the statement of revenues, expenditures and changes in fund balances of the governmental funds) to the change in net position–governmental activities (as reported on the government-wide statement of activities). Not all information above is used in this reconciliation. ANS: Change in total fund balances—governmental funds Less depreciation expense—general capital assets Plus capital outlays—governmental funds Plus change in net position—internal service funds Plus gain on sale of general capital assets Plus repayment of principal on general long-term debt Less proceeds from issuance of general long-term debt Less proceeds from sale of general capital assets Plus expenditures in excess of expenses, governmental funds Change in net position—governmental activities
© Cambridge Business Publishers, 2023 12-58
$360,000 (65,000) 200,000 1,000 500 45,000 (338,000) (22,000) 3,000 $184,500
Advanced Accounting, 5th Edition
19.
Topic: Reconciliation of fund balances to net position LO 3 Below is a list of information items for a county at the end of the current fiscal year. The city uses the consumption method for inventories. Inventories, governmental funds Accrued noncurrent vacation and sick leave of governmental funds OPEB obligation of governmental funds Long-term liabilities of proprietary funds Net position, fiduciary funds Capital assets, less accumulated depreciation, of governmental funds Net pension liability, governmental funds Bonds payable, at par, governmental funds Taxes receivable not a source of current resources, governmental funds Capital assets, less accumulated depreciation, of proprietary funds Accrued interest payable, governmental funds Net position, internal service funds Unamortized bond discounts, governmental funds Unamortized bond premiums, governmental funds Deferred outflows of resources: bond refunding, governmental funds Deferred inflows of resources: bond refunding, governmental funds Long-term asset retirement obligations, government funds Required For each item, indicate whether the balance would be added (A), subtracted (S), or would not appear (N/A) in the reconciliation of governmental fund balances to net position of governmental activities. ANS: Inventories, governmental funds Accrued noncurrent vacation and sick leave of governmental funds OPEB obligation of governmental funds Long-term liabilities of proprietary funds Net position, fiduciary funds Capital assets, less accumulated depreciation, of governmental funds Net pension liability, governmental funds Bonds payable, at par, governmental funds Taxes receivable not a source of current resources, governmental funds Capital assets, less accumulated depreciation, of proprietary funds Accrued interest payable, governmental funds Net position, internal service funds Unamortized bond discounts, governmental funds Unamortized bond premiums, governmental funds Deferred outflows of resources: bond refunding, governmental funds Deferred inflows of resources: bond refunding, governmental funds Long-term asset retirement obligations, government funds
Test Bank, Chapter 12
N/A S S N/A N/A A S S A N/A S A A S A S S
© Cambridge Business Publishers, 2023 12-59
20.
Topic: Reconciliation of change in fund balances to change in net position LO 3 The following information is taken from a city’s ACFR for the current fiscal year. Principal retirement of general obligation bonds Investment in derivative contracts, fiduciary funds Investment in derivative contracts, governmental funds Increase in net position of internal service funds Increase in net position of fiduciary funds Increase in net position of proprietary funds Revenues reported using full accrual basis but not providing current resources, governmental funds Interest income, fiduciary funds Depreciation and amortization expense, governmental fund assets Accrued proprietary funds revenues not providing current resources Pension and OPEB expense not requiring current financial resources, governmental funds Other expenses in excess of expenditures, governmental funds Depreciation and amortization expense, enterprise fund assets General obligation bonds issued Amortization of deferred inflows: pensions and OPEB, governmental funds Pension and OPEB expense not requiring current resources, proprietary funds Amortization of deferred outflows: bond refunding, governmental funds Capital outlay, governmental funds Lease principal payments, governmental funds Required For each item, indicate whether the balance would be added (A), subtracted (S), or would not appear (N/A) in the reconciliation of the change in governmental fund balances to the change in net position of governmental activities.
© Cambridge Business Publishers, 2023 12-60
Advanced Accounting, 5th Edition
ANS:
Principal retirement of general obligation bonds Investment in derivative contracts, fiduciary funds Investment in derivative contracts, governmental funds Increase in net position of internal service funds Increase in net position of fiduciary funds Increase in net position of proprietary funds Revenues reported using full accrual basis but not providing current resources, governmental funds Interest income, fiduciary funds Depreciation and amortization expense, governmental fund assets Accrued proprietary funds revenues not providing current resources Pension and OPEB expense not requiring current financial resources, governmental funds Other expenses in excess of expenditures, governmental funds Depreciation and amortization expense, enterprise fund assets General obligation bonds issued Amortization of deferred inflows: pensions and OPEB, governmental funds Pension and OPEB expense not requiring current resources, proprietary funds Amortization of deferred outflows: bond refunding, governmental funds Capital outlay, governmental funds Lease principal payments, governmental funds
Test Bank, Chapter 12
A N/A N/A A N/A N/A A N/A S N/A S S N/A S A N/A S A A
© Cambridge Business Publishers, 2023 12-61
21.
Topic: Reconciliation of fund balances to net position LO 3 The following information is available concerning the financial activities of a city for its fiscal year. The city uses the purchases method for inventory, and its landfill is a governmental fund. Net pension liability—governmental funds OPEB liability—proprietary funds Inventories—governmental funds Lease obligations—governmental funds Long-term bonds and notes payable—governmental funds Capital assets, net of accumulated depreciation—governmental funds Net position—fiduciary funds Deferred outflows of resources: bond refunding—governmental funds Deferred inflows of resources: pensions—governmental funds OPEB liability—governmental funds Accrued noncurrent vacation and sick leave—governmental funds Accrued interest payable—governmental funds Landfill closure and post-closure care liability—governmental funds Net position—custodial funds Capital assets, net of accumulated depreciation—proprietary funds Required For each item, indicate whether the balance would be added (A), subtracted (S), or would not appear (N/A) in the reconciliation of governmental fund balances to net position of governmental activities. ANS: Net pension liability—governmental funds OPEB liability—proprietary funds Inventories—governmental funds Lease obligations—governmental funds Long-term bonds and notes payable—governmental funds Capital assets, net of accumulated depreciation—governmental funds Net position—fiduciary funds Deferred outflows of resources: bond refunding—governmental funds Deferred inflows of resources: pensions—governmental funds OPEB liability—governmental funds Accrued noncurrent vacation and sick leave—governmental funds Accrued interest payable—governmental funds Landfill closure and post-closure care liability—governmental funds Net position—custodial funds Capital assets, net of accumulated depreciation—proprietary funds
© Cambridge Business Publishers, 2023 12-62
S N/A A S S A N/A A S S S S S N/A N/A
Advanced Accounting, 5th Edition
22.
Topic: Reporting information on the government-wide and funds statements LO 2, 3 Each of the following transactions relates to the activities of a county for the current year. 1.
2. 3. 4. 5. 6.
General obligation bonds with a par value of $10 million are issued at par to finance the construction of administrative facilities. The facilities are constructed for a total cost of $9.9 million, and the remaining cash of $100,000 is transferred to the debt service fund for future payment of bond principal and interest. Equipment is sold by the general fund for $500,000. If the equipment had been reported using full accrual accounting, its book value at the time of sale would have been $450,000. The county water and sewer unit issues $10 million in bonds at par, to finance its operations. The bonds will be paid from water and sewer revenues collected from county residents, and the water and sewer unit is reported in an enterprise fund. Depreciation on water and sewer plant and equipment is $800,000. A special revenue fund purchases equipment for $1 million. Principal payments of $200,000 and interest payments of $300,000 are made on general obligation bonds used to finance general operations. Interest and principal payments are reported in a debt service fund.
Required a. For each of the above transactions, prepare the journal entries necessary to record the transactions in (1) the fund financial statements, and (2) the government-wide financial statements for the county. For the government-wide entries, indicate whether the item is reported in governmental or business-type activities. For the fund entries, indicate which fund is affected. b. For each transaction item, indicate whether it is added, subtracted, or is not included in the reconciliation of the change in fund balances of governmental funds to the change in net position of governmental activities, appearing on the government-wide statements, and the amount of the reconciliation item, if included. ANS: a. Transaction 1. Fund statements Capital projects fund Cash
10,000,000 Bond proceeds (other financing source)
Expenditures—capital outlay
10,000,000 9,900,000
Cash Transfer out (other financing use)
100,000 Cash
Test Bank, Chapter 12
9,900,000
100,000 © Cambridge Business Publishers, 2023 12-63
Debt service fund Cash
100,000 Transfer in (other financing source)
Government-wide statements (governmental activities) Cash Bonds payable Capital assets
100,000
10,000,000 10,000,000 9,900,000
Cash
9,900,000
The transfer is not recorded in the government-wide statements. Transaction 2. Fund statements General fund Cash
500,000 Proceeds from sale of capital assets (other financing source)
Government-wide statements (governmental activities) Cash Capital assets, net Gain on sale of capital assets
500,000
500,000 450,000 50,000
Transaction 3. Fund statements Enterprise fund Cash
10,000,000 Bonds payable
10,000,000
Government-wide statements (business-type activities) Cash
10,000,000 Bonds payable
© Cambridge Business Publishers, 2023 12-64
10,000,000
Advanced Accounting, 5th Edition
Transaction 4. Fund statements Enterprise fund Depreciation expense
800,000 Capital assets, net
800,000
Government-wide statements (business-type activities) Depreciation expense
800,000 Capital assets, net
800,000
Transaction 5. Fund statements Special revenue fund Expenditures—capital outlay
1,000,000 Cash
1,000,000
Government-wide statements (governmental activities) Capital assets
1,000,000 Cash
1,000,000
Transaction 6. Fund statements Debt service fund Expenditures—principal Expenditures—interest
200,000 300,000 Cash
500,000
Government-wide statements (governmental activities) Bonds payable Interest expense
200,000 300,000 Cash
Test Bank, Chapter 12
500,000
© Cambridge Business Publishers, 2023 12-65
b. Transaction 1.
Transaction 2. Transaction 3. Transaction 4. Transaction 5. Transaction 6. 23.
Subtract $10,000,000 Add $9,900,000 Transfer is not included, since it does not affect the total fund balances of governmental funds. Subtract $500,000 Add $50,000 No reconciliation items. No reconciliation items. Add $1,000,000 Add $200,000
Topic: Reporting information on the government-wide and funds statements LO 2, 3 Below are transactions and other financial information for a county government. 1. 2. 3. 4.
5. 6.
The county’s general administrative staff is paid $2,000,000 in cash. An additional $40,000 is owing at year-end and will be paid within 60 days. Federal payroll deductions related to 1. are $200,000. Deductions are paid into a custodial fund but have not yet been remitted to the federal tax authorities. A special revenue fund repays a temporary loan from the general fund, in the amount of $60,000. A capital projects fund receives bills from contractors, in the amount of $8,000,000, related to construction of an addition to the county courthouse. The amount had been previously encumbered in assigned fund balance. The capital projects fund pays $7,500,000 to the contractors. Employees reported in the county landfill fund (enterprise fund) earn future pension and OPEB benefits with a present value of $300,000. Employees reported in the general fund earn future pension benefits with a present value of $500,000.
Required a. For each of the above transactions, prepare journal entries necessary to record the transactions in both the fund financial statements and the government-wide financial statements of the county. For the government-wide entries, indicate whether the item is reported in governmental or business-type activities. For the fund entries, indicate which fund is affected. b. For each transaction item, indicate whether it is added, subtracted, or is not included in the reconciliation of the change in fund balances of governmental funds to the change in net position of governmental activities, appearing on the government-wide statements, and the amount of the reconciliation item, if included.
© Cambridge Business Publishers, 2023 12-66
Advanced Accounting, 5th Edition
ANS: a. Transaction 1. Fund statements General fund Expenditures—general government
2,040,000 Cash Payables
2,000,000 40,000
Government-wide statements (governmental activities) General government expenses
2,040,000 Cash Payables
2,000,000 40,000
Transaction 2. Fund statements General fund Expenditures—general government
200,000 Cash
200,000
Custodial fund Cash
200,000 Additions: payroll deductions
Deductions: payroll deductions
200,000 200,000
Due to federal government
200,000
Government-wide statements (governmental activities) General government expenses
200,000 Cash
200,000
Transaction 3. Fund statements General fund Cash
60,000 Due from special revenue fund
Test Bank, Chapter 12
60,000
© Cambridge Business Publishers, 2023 12-67
Special revenue fund Due to general fund
60,000 Cash
60,000
Government-wide statements: not reported. Amounts owing between governmental funds are netted out on the statement of net position. Transaction 4. Fund statements Capital projects fund Fund balance-assigned
8,000,000 Encumbrances
Capital outlay (expenditure)
8,000,000 8,000,000
Cash Accounts payable
7,500,000 500,000
Government-wide statements (governmental activities) Construction in progress (asset)
8,000,000 Cash Accounts payable
7,500,000 500,000
Transaction 5. Fund statements Enterprise fund Compensation expense
300,000 Pension liability
300,000
Government-wide statements (business-type activities) Landfill expenses
300,000 Pension liability
300,000
Transaction 6. Fund statements:
No entry
Government-wide statements (governmental activities) General government expenses
500,000 Pension liability
© Cambridge Business Publishers, 2023 12-68
500,000
Advanced Accounting, 5th Edition
b. Transaction 1. Transaction 2. Transaction 3. Transaction 4. Transaction 5. Transaction 6. 24.
No reconciliation items. No reconciliation items. No reconciliation items. Add $8,000,000 No reconciliation items. Subtract $500,000
Topic: Liability reconciliations LO 3 Below are events affecting the liability position of a county government. 1.
2.
3.
At the beginning of the year, the general fund refunds 4% bonds issued at a par value of $1,500,000 with a new issue of 20-year $1,520,000 2.5% bonds, and pays the proceeds to an escrow agent. Interest is paid at the end of each year, and principal will be paid at maturity. At the beginning of the year, the general fund issues $300,000 par value 20-year 3% bonds for $302,000. The general fund records payment of principal and interest; a debt service fund is not used. Interest is paid at the end of each year, and principal will be paid at maturity. The general fund pays $200,000 to the pension and OPEB trust fund as the year’s required payment for its employees’ retirement benefits. Based on actuarial calculations, its net pension and OPEB liability increases by a total of $350,000 during the year. The net increase in the pension and OPEB liability caused by changes in assumptions and differences between actual and expected results is $30,000.
Required For each item: a. Prepare the entries made by the general fund to record the events using modified accrual accounting. What is the net effect on governmental fund balances? b. Prepare the entries that would be made to record the events using full accrual accounting. Assume straight-line amortization whenever appropriate. What is the effect on net position of governmental activities? c. Indicate the necessary adjustments to reconcile the change in governmental fund balances to the change in net position of governmental activities.
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-69
ANS: 1. Bond refunding a. General fund entries: Cash Bond proceeds: other financing sources Payment to escrow agent: other financing uses Cash Debt service: interest: expenditure Cash $38,000 = 2.5% x $1,520,000.
1,520,000 1,520,000 1,520,000 1,520,000 38,000 38,000
Net change in fund balances: $(38,000). b. Full accrual entries: Bonds payable (old) Deferred outflow of resources: bond refunding Bonds payable (new) Interest expense Deferred outflow of resources: bond refunding Cash
1,500,000 20,000 1,520,000 39,000 1,000 38,000
Change in net position: $(39,000) c. The reconciliation requires a net adjustment of $(1,000) (= $(39,000) - $(38,000)). Decrease in deferred outflow of resources—bond refunding $(1,000) 2. Bonds issued at a premium a. General fund entries: Cash Bond proceeds: other financing sources Debt service: interest: expenditure Cash $9,000 = 3% x $300,000.
302,000 302,000 9,000 9,000
Net change in fund balances: $302,000 - $9,000 = $293,000
© Cambridge Business Publishers, 2023 12-70
Advanced Accounting, 5th Edition
b. Full accrual entries: Cash Bonds payable (par) Premium on bonds payable
302,000 300,000 2,000
Interest expense Premium on bonds payable Cash
8,900 100 9,000
Change in net position: $(8,900) c. The reconciliation requires a net adjustment of $(301,900) (= $(8,900) - $293,000). Bond proceeds Reduction in unamortized bond premium Net reconciliation
$(302,000) ___100 $(301,900)
3. Pension and OPEB reporting a. General fund entry: Pension and OPEB expenditure Cash
200,000 200,000
Net change in fund balances: $(200,000). b. Full accrual entry: Pension and OPEB expense Deferred outflow of resources: pension and OPEB Pension and OPEB liability Cash
520,000 30,000 350,000 200,000
Change in net position: $(520,000) c. The reconciliation requires a net adjustment of $(320,000) (= $(520,000) - $(200,000)). Increase in pension and OPEB liability Increase in deferred outflow of resources—pension and OPEB Net reconciliation
Test Bank, Chapter 12
$(350,000) 30,000 $(320,000)
© Cambridge Business Publishers, 2023 12-71
25.
Topic: Major funds LO 3 Here is information for a county government: Total assets and deferred outflows Total liabilities and deferred inflows Total revenues Total expenditures/expenses
Governmental funds $ 60,000,000 45,000,000 370,000,000 382,000,000
Enterprise funds $ 52,000,000 50,000,000 300,000,000 299,500,000
The county has four special revenue funds, with the following characteristics: Social services Health fund Parks fund fund Total assets and deferred outflows $ 7,000,000 $ 3,000,000 $ 6,200,000 Total liabilities and deferred inflows 2,000,000 1,800,000 3,000,000 Total revenues 30,000,000 32,000,000 24,000,000 Total expenditures 28,000,000 30,000,000 23,000,000
911 fund $ 5,200,000 4,600,000 22,000,000 21,000,000
Required Which of these special revenue funds will be shown separately, as major funds, in the governmental funds financial statements? ANS: To be major funds, the special revenue funds must first meet one of the following (10% of governmental funds total): Total assets and deferred outflows at least $ 6,000,000 Total liabilities and deferred inflows at least 4,500,000 Total revenues at least 37,000,000 Total expenditures at least 38,200,000 The health fund meets the assets and deferred outflows criterion. The parks fund does not meet any criteria. The social services fund meets the assets and deferred outflows criterion. The 911 fund meets the liabilities and deferred inflows criterion. If a fund meets the first test, the following test is applied (5% of governmental and enterprise funds total, on the same element): Total assets and deferred outflows at least $ 5,600,000 Total liabilities and deferred inflows at least 4,750,000 Total revenues at least 33,500,000 Total expenditures at least 34,075,000 The health fund passes the assets and deferred outflows test. The social services fund passes the assets and deferred outflows test. The 911 fund does not pass the liabilities and deferred inflows test. Therefore, the health and social services funds are major funds and are separately listed in the governmental funds financial statements. © Cambridge Business Publishers, 2023 12-72
Advanced Accounting, 5th Edition
26.
Topic: Major funds LO 3 Here is information for a county government: Governmental funds Total assets and deferred outflows $ 30,000,000 Total liabilities and deferred inflows 22,000,000 Total revenues 200,000,000 Total expenditures/expenses 195,000,000
Enterprise funds $ 5,000,000 2,000,000 60,000,000 58,500,000
The county has two enterprise funds, the landfill and parking funds, and two internal service funds, the central printing and the central motor pool funds, as follows:
Total assets and deferred outflows Total liabilities and deferred inflows Total revenues Total expenses
Landfill fund $ 1,500,000 1,100,000 12,000,000 11,900,000
Parking fund $ 3,500,000 900,000 48,000,000 46,600,000
Required Which of these enterprise funds will be shown separately, as major funds, in the proprietary funds financial statements? ANS: To be major funds, the enterprise funds must first meet one of the following (10% of enterprise funds total): Total assets and deferred outflows at least $ 500,000 Total liabilities and deferred inflows at least 200,000 Total revenues at least 6,000,000 Total expenses at least 5,850,000 The landfill and parking funds both meet all four criteria in the first test. If a fund meets the first test, the following test is applied (5% of governmental and enterprise funds total, on the same element): Total assets and deferred outflows at least $ 1,750,000 Total liabilities and deferred inflows at least 1,200,000 Total revenues at least 13,000,000 Total expenses at least 12,675,000 The landfill fund does not meet any criteria in the second test. The parking fund meets all criteria except one. Therefore, the parking fund is a major enterprise fund.
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-73
27.
Topic: Government-wide versus funds statements: Leases LO 3 Portage County entered the following equipment lease agreements at the beginning of fiscal 2024: 1.
The general fund signed a 3-year lease, with $200,000 paid at signing, and $200,000 due at the end of fiscal 2024 and fiscal 2025. The water and sewer facility (enterprise fund) signed a 2-year lease, with $100,000 paid at signing, and $100,000 due at the end of fiscal 2024.
2.
Both leases have implicit interest rates of 3%, and the leased equipment has an estimated life equal to the life of the lease, no residual value. Round all dollar amounts to the nearest dollar. Required a. Prepare the journal entries to record lease activities in the general fund and the enterprise fund for fiscal 2024. b. Prepare the journal entries to record the lease activities in the government-wide statements for fiscal 2024. c. Identify the reconciliation items for fiscal 2025 (a year later) in 1. The reconciliation of fund balances of governmental funds to net position of governmental activities. 2. The reconciliation of changes in fund balances of governmental funds to change in net position of governmental activities. ANS: a. General fund entries: Beginning of fiscal 2024 Expenditures—leases (capital outlay) 582,694 Other financing sources—leases 582,694 To record lease at inception; $582,694 is the present value of the lease payments at 3%. Expenditures—principal Cash End of fiscal 2024 Expenditures—interest Expenditures—principal Cash To record lease payment. $11,481 = $382,694 x 3%.
200,000 200,000
11,481 188,519 200,000
Water department entries: Beginning of fiscal 2024 Leased equipment 197,087 Lease liability 197,087 To record lease at inception. $197,087 is the present value of the lease payments at 3%. © Cambridge Business Publishers, 2023 12-74
Advanced Accounting, 5th Edition
Lease liability Cash
100,000 100,000
End of fiscal 2024 Interest expense Lease liability Cash To record lease payment. $2,913 = $97,087 x 3%.
2,913 97,087 100,000
Depreciation expense 98,544 Leased equipment 98,544 To record depreciation expense on the leased equipment. $98,544 = $197,087/2. b.
On the government-wide statements, the water department lease is reported the same as in the funds statements. The general fund lease is reported using full accrual accounting, as follows: Beginning of fiscal 2024 Leased equipment Lease liability To record capital lease at inception. Lease liability Cash End of fiscal 2024 Interest expense Lease liability Cash To record lease payment.
582,694 582,694
200,000 200,000
11,481 188,519 200,000
Depreciation expense 194,231 Leased equipment 194,231 To record depreciation expense on the leased equipment. $194,231 = $582,694/3. c. 1.
To reconcile the fund balances of governmental funds to net position of governmental activities for fiscal 2025:
Add general fund leased asset, net of accumulated depreciation ($582,694 – (2 x $194,231))
$194,232
The lease liability is zero at the end of fiscal 2025 so no reconciliation is needed for this item. c. 2.
To reconcile the change in fund balances of governmental funds to change in net position of governmental activities for fiscal 2025:
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-75
Subtract depreciation expense $(194,231) Add principal payment on lease 194,175 The general fund reports an expenditure of $194,175 (= $582,694 - $200,000 - $188,519) to record the remaining principal payment on the lease at the end of fiscal 2025. 28.
Topic: Budgetary comparison schedule LO 4 A county has an enterprise fund that uses full accrual accounting. The county presents a budgetary comparison schedule for the enterprise fund using modified accrual accounting. The fiscal year budgetary comparison schedule reports that actual revenues in excess of expenditures and other financing sources (uses) for the enterprise fund is $1,500,000. However, the enterprise fund’s statement of revenues, expenses, and changes in net position, prepared using full accrual accounting, reports a change in net position of $(810,000). The following information is available for the fiscal year for the enterprise fund. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Depreciation expense was $4,000,000. Compensated absences payable increased by $25,000. Inventory increased by $120,000. Debt principal payment was $1,000,000. Capital outlay was $1,300,000. Accrued interest payable increased by $15,000. OPEB and pension liability increased by $800,000. Deferred outflows of resources for pensions increased $150,000. Amortization of deferred outflow on debt refunding was $290,000. Amortization of bond premium was $250,000.
Required Prepare a schedule reconciling the $1,500,000 revenues in excess of expenditures and other financing sources, shown as the actual result in the enterprise fund’s budgetary comparison schedule, to the $(810,000) actual change in net position, shown in the enterprise fund’s statement of revenues, expenses, and changes in fund net position for the fiscal year. ANS: Revenues in excess of expenditures and other financing sources (uses) Depreciation expense Increase in compensated absences payable Increase in inventory Payment of debt principal Capital outlay Increase in accrued interest payable Increase in OPEB and pension liability Increase in deferred outflows for pensions Amortization of deferred outflow on debt refunding Amortization of bond premium Change in net position © Cambridge Business Publishers, 2023 12-76
$ 1,500,000 (4,000,000) (25,000) 120,000 1,000,000 1,300,000 (15,000) (800,000) 150,000 (290,000) 250,000 $ (810,000)
Advanced Accounting, 5th Edition
29.
Topic: Budgetary comparison schedule LO 4 A county landfill is an enterprise fund. The county presents a budgetary comparison schedule for the landfill, using the modified accrual basis to report actual fiscal year revenues in excess of expenditures and other financing sources (uses) of $500,000. Here is information on the landfill’s activities for the fiscal year: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Depreciation expense was $850,000. Noncurrent compensated absences payable increased by $600. Inventory decreased by $1,400 (purchases method used for modified accrual reporting). Debt principal payment was $1,600,000. Capital outlay was $1,450,000. Accrued interest payable decreased by $400. OPEB and pension liabilities increased by $1,950,000 due to benefits earned by landfill employees during the fiscal year. Amortization of deferred outflows of resources for pensions was $240,000. Book value of capital assets sold was $50,000. Amortization of deferred outflows of resources for debt refunding was $30,000. Amortization of bond premium was $100,000.
Required Calculate the change in net position for the fiscal year, as reported in the landfill’s statement of revenues, expenses, and changes in net position. ANS: Revenues in excess of expenditures and other financing sources (uses) Depreciation expense Increase in compensated absences payable Decrease in inventory Payment of debt principal Capital outlay Decrease in accrued interest payable Increase in OPEB and pension liabilities Amortization of deferred outflows of resources for pensions Book value of capital assets sold Amortization of deferred outflows of resources for debt refunding Amortization of bond premium Change in net position
Test Bank, Chapter 12
$ 500,000 (850,000) (600) (1,400) 1,600,000 1,450,000 400 (1,950,000) (240,000) (50,000) (30,000) 100,000 $ 528,400
© Cambridge Business Publishers, 2023 12-77
30.
Topic: Budgetary comparison schedule LO 4 A county reports a budgetary actual excess of revenues and other financing sources over expenditures and other financing uses of $4,580,000 for the general fund for the current year. For budgetary purposes, the legal basis is used for encumbrances and the purchases method is used for inventory. Budgetary actual revenues and expenditures are reported on a cash basis. The following information is available for the general fund for the current year: Outstanding encumbrances, beginning of year Outstanding encumbrances, end of year Increase in inventory on hand Accrued revenues, cash collection expected within 60 days Accrued expenditures, cash payment expected within 60 days Repayment of temporary loan to capital projects fund, reported as revenue for budget purposes Unbudgeted transfers in
$ 262,000 285,000 63,000 15,000 17,000 325,000 33,000
The general fund uses the modified accrual basis in its operating statement, using the GAAP basis for encumbrances and the consumption method for inventory. Required Prepare a schedule reconciling the budgetary actual results for the general fund to the change in fund balances reported in the general fund’s operating statement. ANS: Budgetary basis change in fund balances Less outstanding encumbrances, beginning of year Plus outstanding encumbrances, end of year Plus increase in inventory on hand Plus accrued revenues, cash collection expected within 60 days Less accrued expenditures, cash payment expected within 60 days Less repayment of temporary loan to capital projects fund, reported as revenue for budget purposes Plus unbudgeted transfers in GAAP basis change in fund balances
© Cambridge Business Publishers, 2023 12-78
$4,580,000 (262,000) 285,000 63,000 15,000 (17,000) (325,000) 33,000 $4,372,000
Advanced Accounting, 5th Edition
31.
Topic: Capital assets in the government-wide and fund statements LO 3, 4, 5 The general fund reports activities related to county buildings and equipment. Following is information concerning these capital assets, for the fiscal year. Beginning Ending balance Increases Decreases balance Capital assets, original cost $10,000,000 $ 450,000 $(250,000) $10,200,000 Accumulated depreciation (2,100,000) (600,000) 100,000 (2,600,000) Capital assets were acquired for cash, and $200,000 in cash was received from the sale of capital assets during the year. Required Calculate the following amounts: a.
Government-wide statement of activities for the fiscal year General government expense $_________________ Gain or loss on sale of capital assets $_________________
b.
Government-wide statement of net position at the end of the fiscal year Capital assets, at cost $_________________ Accumulated depreciation $_________________ Capital assets, net $_________________
c.
Governmental funds statement of revenues, expenditures, and changes in fund balances for the fiscal year Expenditures $_________________ Other financing sources $_________________
ANS: a.
Government-wide statement of activities for the fiscal year General government expense $ 600,000 (depreciation) Gain on sale of capital assets $ 50,000 Book value of capital assets sold = $250,000 - $100,000 = $150,000 Gain on sale = $200,000 - $150,000 = $50,000
b.
Government-wide statement of net position at the end of the fiscal year Capital assets, at cost $10,200,000 Accumulated depreciation (2,600,000) Capital assets, net $ 7,600,000
c.
32.
Governmental funds statement of revenues, expenditures, and changes in fund balances for the fiscal year Expenditures (capital outlay) $ 450,000 Other financing sources $ 200,000 Topic: Financial investments in government-wide and funds statements
Test Bank, Chapter 12
© Cambridge Business Publishers, 2023 12-79
LO 5 Below is information on a county’s investments for the current fiscal year: Investment income and realized net gains, governmental funds Investment income and realized gains, enterprise funds Year-end fair value of governmental fund investments; unrealized gain for the current fiscal year is $80,000 Year-end fair value of securities investments, enterprise funds; unrealized gain for the current fiscal year is $150,000 Year-end fair value of enterprise fund derivatives used for hedging Year-end fair value of enterprise fund derivatives used for hedging
$
400,000 500,000
20,000,000 16,000,000 18,000 (6,000)
Required a. For each item that is reported, identify the fund statement on which it is reported and how the item is categorized. b. For each item that is reported, identify the government-wide statement on which it is reported and how the item is categorized. ANS: a. Governmental funds balance sheet Assets: Investments
$20,000,000
Governmental funds statement of revenues, expenditures, and changes in fund balances Revenues: Investment income and gains $ 480,000 Proprietary funds statement of net position Assets: Investments Deferred outflows of resources Liabilities: Investments Deferred inflows of resources
$16,018,000 6,000 (6,000) (18,000)
Proprietary funds statement of revenues, expenses, and changes in net position Nonoperating items: Investment income and gains $ 650,000 b. Statement of net position Governmental activities Assets: Investments Business-type activities Assets: Investments Deferred outflows of resources Liabilities: Investments Deferred inflows of resources
33.
$ 20,000,000 16,018,000 6,000 (6,000) (18,000)
Statement of activities Governmental activities General revenues: Unrestricted investment income and gains $ Business-type activities General revenues: Unrestricted investment income and gains Topic: Hedge investments in the government-wide statements
© Cambridge Business Publishers, 2023 12-80
480,000 650,000
Advanced Accounting, 5th Edition
LO 5 On January 2, 2023, a county issued $25,000,000 in variable rate debt, with interest paid on December 31 of each year. The variable rate is adjusted at the beginning of each year. The variable rate for 2023 was 3.5%. On the same date, the county entered a receive variable/pay fixed interest rate swap, where the county pays a 3.6% fixed rate to a counterparty. By the end of 2023, the variable rate has increased to 3.72% and the swap has increased in value by $150,000. By the end of 2024, the variable rate has fallen to 3.4% and the county closes the swap, receiving $20,000 from the counterparty. The county has a December 31 year-end. Required Make the journal entries necessary to record the above events on the county’s governmentwide financial statements for 2023 and 2024. ANS: January 2, 2023 Cash
25,000,000 Bonds payable
25,000,000
December 31, 2023 Interest expense-bonds Interest expense-counterparty
875,000 25,000 Cash
900,000
Derivatives investments
150,000 Deferred inflow— derivatives
150,000
December 31, 2024 Interest expense-bonds
930,000 Interest expensecounterparty Cash
30,000 900,000
Deferred inflow—derivatives
130,000
Derivatives investments To revalue the derivatives to market value; $130,000 = $150,000 – $20,000. Cash
20,000 Derivatives investments
Deferred inflow—derivatives
20,000 20,000
Gain on derivatives (income)
Test Bank, Chapter 12
130,000
20,000
© Cambridge Business Publishers, 2023 12-81
34.
Topic: Derivatives investments in the government-wide statements LO 5 On July 1, 2023, Lake County issued $50,000,000 in variable rate debt, with interest paid on June 30 of each year, the county’s fiscal year-end. The variable rate is adjusted at the beginning of each year. The variable rate for fiscal 2024 was 3.6%. On the same date, the county entered a receive variable/pay fixed interest rate swap, where the county pays a 3.45% fixed rate to a counterparty. The swap qualifies for hedge accounting. By the end of fiscal 2024, the variable rate has declined to 3.4% and the swap has declined in value by $100,000. By the end of fiscal 2025, the variable rate has fallen to 3.38%, the swap declines in value by $75,000, and the county discontinues use of hedge accounting for the swap. Required Make the journal entries necessary to record the above events on Lake County’s governmentwide financial statements for fiscal 2024 and fiscal 2025. ANS: July 1, 2023 Cash
50,000,000 Bonds payable
June 30, 2024 Interest expense-bonds
50,000,000
1,800,000 Interest expensecounterparty Cash
Deferred outflow—derivatives
75,000 1,725,000 100,000
Derivatives investments June 30, 2025 Interest expense-bonds Interest expense-counterparty
100,000
1,700,000 25,000 Cash
Deferred outflow—derivatives
1,725,000 75,000
Derivatives investments Loss on derivatives (income) Deferred outflow— derivatives To discontinue use of hedge accounting.
© Cambridge Business Publishers, 2023 12-82
75,000 175,000 175,000
Advanced Accounting, 5th Edition
35.
Topic: Pension reporting LO 5 Below is information on a county’s defined benefit pensions for employees of governmental and proprietary funds, found on the government-wide financial statements for the current fiscal year. • The total pension liability, measured at the end of the fiscal year, is $400,000,000, while the total pension liability, measured at the beginning of the fiscal year, is $370,000,000. • Net increase in deferred outflows related to pensions was $20,000,000; amortization of deferred outflows to pension expense was $500,000. • Net increase in deferred inflows related to pensions was $2,000,000; amortization of deferred inflows to pension expense was $100,000. • The county transferred $15,000,000 in cash to the pension trust fund. Required Prepare the summary journal entry or entries to record the county’s pension expense and cash payment for the current fiscal year in the government-wide financial statements. ANS: Deferred outflows—pensions Pension liability Increases qualifying for deferral.
20,500,000 20,500,000
Pension expense Deferred outflows—pensions Amortization of deferrals.
500,000
Pension liability Deferred inflows—pensions Increases qualifying for deferral.
2,100,000
Deferred inflows—pensions Pension expense Amortization of deferrals.
500,000
2,100,000
100,000 100,000
Pension liability Cash Payment to pension trust fund.
15,000,000
Pension expense Pension liability To adjust the pension liability to its end-of-year value.
26,600,000
Test Bank, Chapter 12
15,000,000
26,600,000
© Cambridge Business Publishers, 2023 12-83
or Deferred outflows—pensions Pension expense Deferred inflows—pensions Pension liability Cash Net entry for the year.
© Cambridge Business Publishers, 2023 12-84
20,000,000 27,000,000 2,000,000 30,000,000 15,000,000
Advanced Accounting, 5th Edition
TEST BANK CHAPTER 13 Private Not-For-Profit Organizations MULTIPLE CHOICE 1.
2.
3.
4.
Topic: NFP reporting environment LO 1 A private NFP organization files standardized financial information on Form 990 with what government entity? a. b. c. d.
Department of Justice Federal Bureau of Investigation Internal Revenue Service Department of Commerce
ANS:
c
Topic: NFP reporting environment LO 1 FASB Concepts Statement No. 4 specifies the basic objectives of financial reporting as all of the following except: a. b. c. d.
Information should be useful in assessing management performance. Information should useful in evaluating services provided. Information should be useful for making resource allocation decisions. Information should be useful in assessing whether the organization is in compliance with relevant laws.
ANS:
d
Topic: NFP reporting environment LO 1 Reporting standards for private NFP organizations are promulgated by the: a. b. c. d.
SEC GASB American Institute of Philanthropy FASB
ANS:
d
Topic: NFP reporting environment LO 1 Charity watchdog groups regularly rate charitable organizations on: a. b. c. d.
Change in net assets as a percent of total assets Fund-raising expenses as a percent of total expenses Inventory and receivables turnover Intangible assets as a percent of total assets
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-1
ANS: 5.
6.
7.
Topic: Financial statements LO 1 The operating statement for a private NFP organization is called a: a. b. c. d.
Statement of revenues and expenses Statement of activities Statement of changes in net assets Statement of changes in fund balances
ANS:
b
Topic: Financial statements LO 1 The balance sheet for a private NFP organization is called a: a. b. c. d.
Statement of net assets Balance sheet Statement of financial position Statement of fund balances
ANS:
c
Topic: Financial statements LO 1 A private NFP organization’s financial statements include the activities of a. b. c.
8.
b
d.
the NFP organization as a separate legal entity. the NFP organization and related legal trusts. the NFP organization and other entities whose primary purpose is to support its activities. the NFP organization and all organizations it controls.
ANS:
d
Topic: Financial statements LO 1 Private NFP organizations report their financial results using what basis of accounting? a. b. c. d.
full accrual basis modified accrual basis fund basis cash basis
ANS
a
©Cambridge Business Publishers, 2023 13-2
Advanced Accounting, 5th Edition
9.
10.
11.
12.
Topic: Statement of financial position LO 1 In a private NFP organization’s statement of financial position, what categories of net assets are displayed? a. b. c. d.
Unrestricted, temporarily restricted, and permanently restricted net assets Net assets with board restrictions and net assets without board restrictions Net assets with donor restrictions and net assets without donor restrictions Operating net assets and nonoperating net assets
ANS:
c
Topic: Statement of financial position LO 1 In a private NFP organization’s statement of financial position, how is cash received from a capital campaign, to be used to build facilities, reported? a. b. c. d.
Combined with the unrestricted cash balance Restricted cash, separately from unrestricted cash Investments Capital assets
ANS:
b
Topic: Statement of financial position LO 1 The board of directors of a private NFP organization sets aside net assets for future payment of debt. How can this be displayed on the organization’s statement of financial position? a. b. c. d.
A category of net assets with board restrictions A category of net assets without donor restrictions A category of net assets with donor restrictions Reporting standards prohibit display of this information.
ANS:
b
Topic: Statement of financial position LO 1 How does a private NFP organization value its investments in debt and equity securities on its statement of financial position? a. b. c. d.
Market value at year-end Original cost Original cost for debt securities and market value at year-end for equity securities Original cost for equity securities and market value at year-end for debt securities
ANS:
a
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-3
13.
14.
15.
Topic: Statement of financial position LO 1 How does a private NFP organization value its investments in debt securities on its statement of financial position? a. b. c. d.
Market value at year-end Original cost Market value for trading and AFS securities and amortized cost for HTM securities Market value for trading securities and cost for non-trading securities
ANS:
a
Topic: Statement of financial position LO 1 On a private NFP organization’s statement of financial position, the asset “restricted cash” may represent: a. b. c. d.
The balance in net assets with donor restrictions. Cash set aside by its board of directors for construction activities. Investments in short-term securities. Cash donated as a permanent endowment.
ANS:
d
Topic: Statement of activities LO 1 On the operating statement of a private NFP organization, expenses reduce a. b. c.
16.
d.
Net assets with donor restrictions only. Net assets without donor restrictions only. Net assets with donor restrictions if the resources used were donor-restricted for that use and net assets without donor restrictions if the resources used were not donorrestricted. Total net assets, without specifying a category.
ANS
b
Topic: Statement of activities LO 1 Functional categories of expenses for a private NFP organization are: a. b. c. d.
Cost of goods sold, general and administrative, and financial Operating and nonoperating Programs and support Expenses with donor restrictions and expenses without donor restrictions
ANS:
c
©Cambridge Business Publishers, 2023 13-4
Advanced Accounting, 5th Edition
17.
18.
19.
Topic: Statement of activities LO 1 A natural category of expenses for a private NFP organization may be: a. b. c. d.
Administrative expenses Nonoperating expenses Cost of goods sold Salaries
ANS:
d
Topic: Statement of activities LO 1 A private NFP organization is required to report its expenses a. b. c. d.
In both functional and natural classifications. Only in functional classifications. Only in natural classifications. In both functional and natural classifications if it is a voluntary health and welfare organization; otherwise only in functional classifications.
ANS:
a
Topic: Statement of activities LO 1 The line labeled “net assets released from purpose restrictions,” reported on a private NFP organization’s operating statement, represents a. b.
d.
Donor-restricted resources used according to the donor’s wishes during the year. Donor-restricted resources used to finance the organization’s programs during the year, but not used for administrative expenses. Donor-restricted resources used to acquire capital assets, but not for program or administrative expenses. Resources used to pay the principal of loans.
ANS:
a
c.
20.
Topic: Statement of activities LO 1 Assume a private NFP organization displays expenses in natural classifications on its statement of activities. In this case, what other disclosure requirement must be met for expenses? a. b. c. d.
Footnote disclosure of both functional and natural classifications. Footnote disclosure of functional classifications. Footnote disclosure of definition of natural classifications. No other disclosure of expenses is required.
ANS:
a
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-5
21.
Topic: Intermediate performance measures LO 1 Which statement is true concerning intermediate performance measures displayed in a private VHWO organization’s operating statement? a. b. c. d. ANS:
22.
23.
Intermediate performance measures are not allowed; only the total change in each category of net assets is displayed. Intermediate performance measures, standardized by the FASB, are allowed but not required for all VHWO organizations. Intermediate performance measures are allowed, and organizations have flexibility in determining the format that best communicates the organization’s financial performance. Intermediate performance measures, standardized by the FASB, are required for all VHWO organizations. c
Topic: Intermediate performance measures LO 1 If an intermediate measure of operating performance is displayed in the statement of activities of a private VHWO organization, which item must be excluded? a. b. c. d.
Impairment losses on long-lived assets on hand at year-end. Pension and OPEB expense for current service. All pension and OPEB expense. Gain or loss on the sale of long-lived assets associated with discontinued operations.
ANS:
d
Topic: Statement of cash flows LO 1 The National Red Cross receives dividend and interest income on its investments, in cash. In which section is this cash receipt reported in its statement of cash flows? a. b. c. d.
Cash from operating activities Cash from investing activities Cash from financing activities Not reported
ANS:
a
©Cambridge Business Publishers, 2023 13-6
Advanced Accounting, 5th Edition
24.
25.
26.
27.
Topic: Statement of cash flows LO 1 A donor makes a contribution of $1 million in cash to a private NFP organization as a permanent endowment. The organization may use investment income for any purpose. On the organization’s statement of cash flows, the $1 million donation appears in which section? a. b. c. d.
Cash from operating activities Cash from investing activities Cash from financing activities Not reported
ANS:
c
Topic: Statement of cash flows LO 1 A donor makes a contribution of $1 million in cash to a private NFP organization as a permanent endowment. The organization may use investment income for any purpose. On the organization’s statement of cash flows, cash from the investment income appears in which section? a. b. c. d.
Cash from operating activities Cash from investing activities Cash from financing activities Not reported
ANS:
a
Topic: Statement of cash flows LO 1 A private NFP organization makes a cash payment for interest on its long-term loans. On the organization’s statement of cash flows, the payment appears in which section? a. b. c. d.
Cash from operating activities Cash from investing activities Cash from financing activities Not reported
ANS:
a
Topic: Statement of cash flows LO 1 A private NFP organization accepts a donation of securities, with no donor restrictions, and immediately sells the securities. The proceeds appear in which section of the organization’s statement of cash flows? a. b. c. d.
Cash from operating activities Cash from investing activities Cash from financing activities Not reported
ANS:
a
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-7
28.
Topic: Statement of cash flows LO 1 If a private NFP organization uses the direct method to report the operating section of its statement of cash flows, a. b. c. d. ANS:
29.
30.
31.
A reconciliation of the change in net assets to cash from operating activities, in any format, is not required. A reconciliation of the change in net assets to cash from operating activities is required. A reconciliation of the change in net assets without donor restrictions to cash from operating activities is required. A reconciliation of the change in net assets with donor restrictions to cash from operating activities is required. a
Topic: Statement of cash flows LO 1 A private NFP’s statement of cash flows presents cash from operating activities using the indirect method. In the reconciliation of the change in net assets to cash from operating activities, which item is added? a. b. c. d.
Donations of endowment cash Increase in loans payable Increase in contributions receivable Unrealized losses on investments
ANS:
d
Topic: Statement of cash flows LO 1 A private NFP’s statement of cash flows presents cash from operating activities using the indirect method. The reconciliation to cash from operating activities requires adding which item? a. b. c. d.
Promises to contribute Depreciation expense Contributions of services Increase in present value of contributions receivable
ANS:
b
Topic: Statement of cash flows LO 1 A private NFP’s statement of cash flows presents cash from operating activities using the indirect method. In the reconciliation of the change in net assets to cash from operating activities, which item is subtracted? a. b. c. d.
Decrease in accounts payable Depreciation expense Contributions of administrative services Loss on sale of investments
©Cambridge Business Publishers, 2023 13-8
Advanced Accounting, 5th Edition
ANS: 32.
33.
34.
35.
a
Topic: Statement of cash flows LO 1 A private NFP’s statement of cash flows presents cash from operating activities using the indirect method. The indirect method reconciles a. b. c. d.
the change in unrestricted net assets to cash from operating activities. the total change in net assets to cash from operating activities. the change in restricted net assets to cash from operating activities. the change in operating net assets to the change in cash from operating activities.
ANS:
b
Topic: Liquidity disclosures LO 1 Private NFP organizations are required to provide liquidity disclosures on a. b. c. d.
The amount of financial assets available to pay existing liabilities as of year-end. Expected contributions available in the next three months to pay current obligations. The availability of financial assets to pay for general expenditures during the next year. The realizable value of financial assets on hand at year-end.
ANS:
c
Topic: Cash contributions received LO 2 Cash contributions are received by an NFP organization. The organization’s Board of Directors decides to set aside the money to pay for new computers and software. The donations are reported as: a. b. c. d.
Liabilities Contributions, increasing net assets without donor restrictions Contributions, increasing net assets with donor restrictions Reductions in contributions receivable
ANS:
b
Topic: Contributions of services LO 2 A contractor contributes services valued at $100,000 to build a new building for a private NFP organization. The net effect of this contribution in the organization’s statement of activities is: a. b. c. d.
Increase in expenses and increase in contributions of $100,000; no net effect on net assets. $100,000 increase in net assets with donor restrictions. $100,000 increase in net assets without donor restrictions. Not reported in the statement of activities.
ANS:
c
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-9
36.
Topic: Contributions of services LO 2 A CPA contributes services valued at $5,000 to prepare Form 990 for a private NFP organization. The net effect of this contribution in the organization’s statement of activities is: a.
37.
b. c. d.
Increase in expenses and increase in contributions of $5,000; no net effect on net assets. $5,000 increase in net assets with donor restrictions. $5,000 increase in net assets without donor restrictions. Not reported in the statement of activities.
ANS:
a
Topic: Contributions of services LO 2 Students and faculty volunteer their time to the activities of Beta Alpha Psi. The fair value of their services is $25,000. How is this information reported Beta Alpha Psi’s statement of activities? a.
38.
39.
b. c. d.
Increase in expenses and increase in contributions of $25,000; no net effect on net assets. $25,000 increase in net assets with donor restrictions. $25,000 increase in net assets without donor restrictions. Not reported in the statement of activities.
ANS:
d
Topic: Contributions of services LO 2 The American Museum of Natural History makes the following statement in the footnotes to its annual report: “Hundreds of volunteers, including members of the Museum’s Board of Trustees, have made significant contributions of time in furtherance of the Museum’s mission.” How does the Museum most likely report these contributions in its financial statements? a. b. c. d.
Reported as expenses and revenues in the statement of activities Not reported Reported as revenues only in the statement of activities Reported as deferred inflows in the statement of financial position
ANS:
b
Topic: Donations of goods LO 2 An NFP organization receives supplies from a donor. At what amount is the donation reported in contribution revenue? a. b. c. d.
Fair value at the date of donation Fair value at year-end The donor’s cost Zero
©Cambridge Business Publishers, 2023 13-10
Advanced Accounting, 5th Edition
ANS: 40.
Topic: Donor-restricted contributions LO 2 Beta Alpha Psi reports a balance of about $23,000 in net assets with donor restrictions on its 2020 statement of financial position, labeled “Inclusive Leadership Awards.” What is the interpretation of this amount? a. b. c. d. ANS:
41.
Donors contributed $23,000 for inclusive leadership awards in fiscal 2020. Beta Alpha Psi spent $23,000 for inclusive leadership awards in fiscal 2020. Of total contributions collected for inclusive leadership awards in fiscal 2020, $23,000 has not yet been spent as of the end of 2020. Of total contributions collected for inclusive leadership awards in the past, $23,000 has not yet been spent as of the end of 2020. d
Topic: Donor-restricted contributions LO 2 Beta Alpha Psi reports about $13,000 in net assets released from donor restrictions on its 2020 statement of financial position, labeled “Inclusive Leadership Awards.” What is the interpretation of this amount? a. b. c. d. ANS:
42.
a
Donors contributed $13,000 for inclusive leadership awards in fiscal 2020. Beta Alpha Psi spent $13,000 for inclusive leadership awards in fiscal 2020. Of total contributions collected for inclusive leadership awards in fiscal 2020, $13,000 has been spent as of the end of 2020. Of total contributions collected for inclusive leadership awards in the past, $13,000 has not yet been spent as of the end of 2020. b
Topic: Restricted contributions LO 2 Make-A-Wish Foundation accepts $40,000 in donations that are donor designated to specific wish granting activities. When the resources are spent for this purpose, the statement of activities will report: a. b. c. d.
ANS:
Expenses of $40,000, as a decrease in net assets without donor restrictions. Expenses of $40,000, as a decrease in net assets with donor restrictions. Net assets released, as a $40,000 decrease in net assets with donor restrictions and a $40,000 increase in net assets without donor restrictions, and expenses of $40,000, as a decrease in net assets without donor restrictions. Net assets released, as a $40,000 increase in net assets with donor restrictions and a $40,000 decrease in net assets without donor restrictions, and expenses of $40,000, as a decrease in net assets with donor restrictions. c
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-11
43.
Topic: Restricted contributions LO 2 During the year, a not-for-profit organization receives cash contributions of $1,000,000 that are donor-restricted for constructing a new office building. As of year-end, $900,000 of these contributions have been used for building construction, and the organization holds the remaining balance in cash. The reporting of this information includes all of the following except: a. b. c. d. ANS:
44.
a Cash that is donor-restricted for construction is reported as restricted cash, separately from cash and other assets available for current use.
Topic: Unconditional promises of contributions to be collected within one year LO 2 An NFP organization records promises of contributions totaling $500,000, expected to be collected within the next year. Of this total, $10,000 is expected to be uncollectible. The contributions are not donor-restricted. How is this information reported in the organization’s financial statements? a. b. c. d. ANS:
45.
$100,000 included in the cash balance on the statement of financial position $1,000,000 in contribution revenue, increasing net assets with donor restrictions on the statement of activities $900,000 in construction in progress on the statement of financial position $900,000 reduction in net assets with donor restrictions for net assets released from restrictions on the statement of activities
Statement of activities: revenue $490,000; statement of financial position, $490,000 net contributions receivable. Statement of activities: revenue $500,000, bad debt expense $10,000; statement of financial position, $500,000 net contributions receivable. Statement of activities: revenue $500,000, bad debt expense $10,000; statement of financial position, $490,000 net contributions receivable. Statement of activities: revenue $500,000; statement of financial position, $500,000 net contributions receivable. c
Topic: Unconditional promises of contributions to be collected within one year LO 2 An NFP organization records promises of contributions totaling $500,000, expected to be collected within the next year. Of this total, $10,000 is expected to be uncollectible. The contributions are donor-restricted to specific projects. How is this information reported in the organization’s financial statements? a. b. c. d.
Statement of activities: revenue $490,000; statement of financial position, $490,000 net contributions receivable. Statement of activities: revenue $500,000, bad debt expense $10,000; statement of financial position, $500,000 net contributions receivable. Statement of activities: revenue $500,000, bad debt expense $10,000; statement of financial position, $490,000 net contributions receivable. Statement of activities: revenue $500,000; statement of financial position, $500,000 net contributions receivable.
©Cambridge Business Publishers, 2023 13-12
Advanced Accounting, 5th Edition
ANS:
a
Use the following information to answer Questions 46 and 47. At the start of the year, Habitat for Humanity reports gross contributions receivable of $9,000 and a related allowance for bad debts of $1,350. During the year, $8,000 of these receivables are collected and the rest are written off. Habitat for Humanity records current year contributions of $200,000, of which $195,000 are collected in cash. Its ending allowance for uncollectible contributions balance should be 15% of uncollected receivables. These promises are expected to be collected within one year, and are not donor-restricted. 46.
47.
Topic: Unconditional promises of contributions to be collected within one year LO 2 What is bad debt expense for the current year? a. b. c. d.
$750 $400 $350 $0
ANS:
a
Topic: Unconditional promises of contributions to be collected within one year LO 2 What is contribution revenue for the current year? a. b. c. d.
$199,250 $200,350 $200,000 $199,600
ANS:
b
Entries for Questions 46 and 47: Cash
8,000 Contributions receivable
Allowance for uncollectibles
8,000 1,350
Contributions receivable Contribution revenue Contributions receivable Cash
1,000 350 5,000 195,000
Contribution revenue Bad debt expense
750 Allowance for uncollectibles
Test Bank, Chapter 13
200,000
750 ©Cambridge Business Publishers, 2023 13-13
48.
49.
Topic: Unconditional promises of contributions to be collected in future years LO 2 An increase in the present value of reported promises of contributions, where the contributions are donor-restricted: a. b. c. d.
Increases net assets without donor restrictions Increases net assets with donor restrictions Increases nonoperating gains Is not reported
ANS:
b
Topic: Unconditional promises of contributions LO 2 Make-A-Wish Foundation reports contributions receivable on its balance sheet, expected to be collected in three years. How is this receivable measured? a. b. c. d.
Gross contributions, adjusted for expected uncollectibles Present value of future contributions, adjusted for expected uncollectibles Present value of future contributions Gross contributions, without any adjustments
ANS:
b
Use the following information to answer Questions 50 – 52. At the beginning of 2024, a donor makes a documented promise to contribute $100,000 to a private NFP organization at the end of 2025. The donor says the contribution must be used for a specific purpose and follows through on his promise at the end of 2025. The appropriate interest rate is 4%. The promise is considered fully collectible. 50.
Topic: Unconditional promises of contributions LO 2 By how much does this donation increase the organization’s net assets with donor restrictions in 2024? a. b. c. d.
$100,000 $ 92,456 $ 96,154 $ 0
ANS:
c ($100,000/(1.04)2 ) + [(($100,000/(1.04)2 ) x 0.04] = $96,154
©Cambridge Business Publishers, 2023 13-14
Advanced Accounting, 5th Edition
51.
52.
Topic: Unconditional promises of contributions LO 2 At what net amount is the contributions receivable reported on the statement of financial position at the end of 2024? a. b. c. d.
$ 92,456 $100,000 $ 96,154 $104,000
ANS:
c $92,456 + $3,698 = $96,154
Topic: Unconditional promises of contributions LO 2 By how much does this donation increase the organization’s net assets with donor restrictions in 2025? a. b. c. d.
$ 3,846 $100,000 $ 92,456 $ 0
ANS:
a
Entries for Questions 50 - 52: 2024: Contributions receivable
100,000 Discount on contributions receivable Contributions revenue—restricted
Discount on contributions receivable
7,544 92,456
3,698 Contributions revenue—restricted
2025: Discount on contributions receivable
3,698
3,846 Contributions revenue—restricted
Cash
100,000 Contributions receivable
Test Bank, Chapter 13
3,846
100,000
©Cambridge Business Publishers, 2023 13-15
53.
Topic: Unconditional promises of contributions LO 2 A donor makes a documented promise to contribute $500,000 to an NFP organization at the end of two years. There are no restrictions on how the money is spent. The present value of the promise is $475,000 at the time the promise is made, and is $487,000 at the end of that year. At the end of two years, the organization receives the $500,000 and decides to set it aside for purchase of equipment. The following year, $300,000 is spent on equipment. What is the net increase (decrease) in unrestricted net assets in each of the three years? a. b. c. d.
Year 1 $475,000 $487,000 $0 $487,000
ANS:
d
Year 2 $25,000 $13,000 $0 $13,000
Year 3 $(500,000) $(500,000) $500,000 $0
Year 1: Contributions receivable
500,000 Discount on contributions receivable Contributions revenue—unrestricted
Discount on contributions receivable
25,000 475,000
12,000 Contributions revenue—unrestricted
Year 2: Discount on contributions receivable
12,000
13,000 Contributions revenue—unrestricted
Cash
13,000 500,000
Contributions receivable Year 3: Equipment
500,000
300,000 Cash
300,000
Use the following information to answer Questions 54 – 56 below. At the beginning of 2024, a donor makes a documented promise to contribute $25,000 per year to a private NFP organization at the end of each of the years 2024, 2025, and 2026. The donor specifies the contributions for after-school programs, and the appropriate discount rate is 5%. The organization estimates that collections will be $22,000 per year for each of the three years.
©Cambridge Business Publishers, 2023 13-16
Advanced Accounting, 5th Edition
54.
55.
56.
Topic: Unconditional promises of contributions LO 2 When the promise is recorded at the beginning of 2024, contributions receivable is debited for: a. b. c. d.
$75,000 $66,000 $59,911 $68,911
ANS:
b
Topic: Unconditional promises of contributions LO 2 When the promise is recorded at the beginning of 2024, contributions revenue increases net assets with donor restrictions by: a. b. c. d.
$75,000 $66,000 $59,911 $68,911
ANS:
c
Topic: Unconditional promises of contributions LO 2 When the promise is recorded at the beginning of 2024, the allowance for uncollectible contributions is credited for: a. b. c. d.
$15,089 $ 9,000 $ 6,089 $0
ANS:
d
Notes for Questions 54 – 56: The entry to record the documented promise is: Contributions receivable Contribution revenue—restricted (1) Discount on contributions receivable
66,000 59,911 6,089
(1) $22,000/1.05 + $22,000/(1.05)2 + $22,000/(1.05)3 = $59,911
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-17
57.
58.
Topic: Conditional contributions LO 2 A private NFP organization receives donations as part of a capital campaign to raise money to build new facilities. The organization needs to raise $10 million to start construction, and they haven’t reached that goal yet. The donations received are reported as increases in: a. b. c. d.
Contributions receivable Liabilities Net assets with donor restrictions Net assets without donor restrictions
ANS:
b
Topic: Donor-imposed restrictions in perpetuity LO 2 Early in 2024, a donor contributes $1,000,000 in cash to an NFP organization, specifying that income from its investment be used for maintenance of playground equipment. The organization invests the $1,000,000 and $30,000 in cash investment income is earned during the year. In 2025, $25,000 is spent on repairs to playground equipment. By what amount does restricted net assets increase (decrease) in 2024 and 2025? a. b. c. d. ANS:
2024 $1,030,000 $1,030,000 $1,000,000 $1,000,000
2025 $(25,000) $(30,000) $(25,000) $(30,000)
a 2024: Restricted cash
1,000,000 Contribution revenue—restricted
Investments
1,000,000 1,000,000
Restricted cash
1,000,000
Cash
30,000 Investment income—restricted
2025: Net assets released from restrictions— restricted
30,000
25,000 Net assets released from restrictions—unrestricted
Repairs expense
25,000 Cash
©Cambridge Business Publishers, 2023 13-18
25,000
25,000
Advanced Accounting, 5th Edition
Use the following information to answer Questions 59 – 61 below. At the beginning of 2024, a private NFP organization receives a donation of equipment with a fair value of $1,000,000 and an estimated useful life of 5 years, straight-line, no residual value. 59.
Topic: Contributions of long-lived assets LO 2 The donor puts no restrictions on the donation. What items appear in the 2024 statement of activities related to this donation? a. b. c.
d. ANS: 60.
Contribution revenue (increases net assets with donor restrictions) $1,000,000; expense (reduces net assets without donor restrictions) $200,000. Contribution revenue (increases net assets without donor restrictions) $1,000,000; expense (reduces net assets without donor restrictions) $200,000. Contribution revenue (increases net assets with donor restrictions) $1,000,000; net assets released from restrictions (increases net assets without donor restrictions and reduces net assets with donor restrictions) $200,000; expense (reduces net assets without donor restrictions) $200,000. Contribution revenue (increases net assets without donor restrictions) $1,000,000; expense (reduces net assets with donor restrictions) $200,000. b
Topic: Contributions of long-lived assets LO 2 The donor requires the equipment to be used by the organization for its 5-year life. What items appear in the 2024 statement of activities related to this donation? a. b. c.
d. ANS:
Contribution revenue (increases net assets with donor restrictions) $1,000,000; expense (reduces net assets without donor restrictions) $200,000. Contribution revenue (increases net assets without donor restrictions) $1,000,000; expense (reduces net assets without donor restrictions) $200,000. Contribution revenue (increases net assets with donor restrictions) $1,000,000; net assets released from restrictions (increases net assets without donor restrictions and reduces net assets with donor restrictions) $200,000; expense (reduces net assets without donor restrictions) $200,000. Contribution revenue (increases net assets without donor restrictions) $1,000,000; expense (reduces net assets with donor restrictions) $200,000. c
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-19
61.
Topic: Contributions of long-lived assets LO 2 The donor requires the organization to use the equipment for two years. What items appear in the 2024 statement of activities related to this donation? a. b. c.
d.
ANS:
Contribution revenue (increases net assets with donor restrictions) $1,000,000; expense (reduces net assets without donor restrictions) $500,000. Contribution revenue (increases net assets without donor restrictions) $1,000,000; expense (reduces net assets without donor restrictions) $200,000. Contribution revenue (increases net assets with donor restrictions) $1,000,000; net assets released from restrictions (increases net assets without donor restrictions and reduces net assets with donor restrictions) $200,000; expense (reduces net assets without donor restrictions) $200,000. Contribution revenue (increases net assets with donor restrictions) $1,000,000; net assets released from restrictions (increases net assets without donor restrictions and reduces net assets with donor restrictions) $500,000; expense (reduces net assets without donor restrictions) $200,000. d
Use the following information to answer Questions 62 and 63 below: At the beginning of the current year, a donor gave a private NFP organization $100,000 in cash, with the provision that the cash be invested in income-producing securities. The center is to pay the donor $3,000 at the end of each year for his remaining life. Upon his death, remaining resources become available to the center with no restrictions as to use. The center invested the $100,000 in securities earning cash dividend and interest income of $3,500 in the current year. The securities have a fair value of $102,000 at the end of the year. The donor’s life expectancy is 10 years, and the annual discount rate is 4%. The present value of $1/year for 10 years, discounted at 4%, is $8.11. 62.
Topic: Annuity trust agreement LO 2 Contribution revenue increases net assets with donor restrictions on the current year’s statement of activities by a. b. c. d.
$ 75,670 $ 72,670 $ 79,170 $100,000
ANS:
a $100,000 – ($3,000 x 8.11) = $75,670
©Cambridge Business Publishers, 2023 13-20
Advanced Accounting, 5th Edition
63.
Topic: Annuity trust agreement LO 2 The annuity payable, reported on the statement of net position for the current year-end, is a. b. c. d.
$24,330 $27,830 $29,830 $26,830
ANS:
d $24,330 + $5,500 - $3,000 = $26,830
Notes for Questions 62 and 63: Entries for the current year are: Investments Annuity payable Contribution revenue—restricted $24,330 = $3,000 x 8.11
100,000 24,330 75,670
Restricted cash Investments Annuity payable
3,500 2,000
Annuity payable Restricted cash
3,000
5,500
3,000
Use the following information to answer Questions 64 and 65 below: At the beginning of the current year, a donor gave a private NFP organization $100,000 in cash, with the provision that the cash be invested in income-producing securities. The center is to pay the donor all income generated on the investments for his remaining life. Income is defined as cash income and unrealized investment gains or losses. Upon his death, remaining resources become available to the center with no restrictions as to use. The center invested the $100,000 in securities earning cash dividend and interest income of $3,500 in the current year. The securities have a fair value of $102,000 at the end of the year. The donor’s life expectancy is 10 years, and the annual discount rate is 4%. The present value of $1/year for 10 years, discounted at 4%, is $8.11. 64.
Topic: Life-income agreement LO 2 Contribution revenue increases net assets with donor restrictions on the current year’s statement of activities by a. b. c. d.
$ 75,670 $ 24,330 $100,000 $ 0
ANS:
c
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-21
65.
Topic: Life-income agreement LO 2 The annuity payable, reported on the statement of net position for the current year-end, is a. b. c. d.
$ 78,170 $ 26,830 $100,000 $ 0
ANS:
d
Notes for Questions 64 and 65: Entries for the current year are: Investments Contribution revenue—restricted
66.
100,000 100,000
Restricted cash Investments Life income payable
3,500 2,000
Life income payable Restricted cash
5,500
5,500
5,500
Topic: Contributions on behalf of others LO 2 During the year, the United Way receives $100,000 in cash contributions that are donordesignated for the Salvation Army. The United Way distributes $80,000 of these contributions to the Salvation Army by year-end. This information is reported in the United Way’s financial statements for the year as: a. b. c. d.
Contributions revenue of $100,000, increasing net assets with donor restrictions, and expenses of $80,000, reducing net assets with donor restrictions, both on the statement of activities. Liability to the Salvation Army of $20,000 on the statement of financial position. Receivable from the Salvation Army of $20,000 on the statement of financial position. Contributions revenue of $100,000, increasing net assets with donor restrictions, net assets released from restrictions of $80,000, increasing net assets without donor restrictions and reducing net assets with donor restrictions, and expenses of $80,000, reducing net assets without donor restrictions, all on the statement of activities.
ANS:
b
©Cambridge Business Publishers, 2023 13-22
Advanced Accounting, 5th Edition
67.
68.
69.
Topic: Contributions on behalf of others LO 2 During the year, the United Way receives $100,000 in cash contributions that are to be distributed to other organizations at the discretion of the United Way. $80,000 is distributed during the year. What is the net effect of these events on United Way’s net assets? a. b. c. d.
$20,000 increase No effect $100,000 increase $80,000 decrease
ANS:
a $100,000 contributions revenue less $80,000 expenses (“donor-advised giving”)
Topic: Investments LO 3 At the end of 2024, a donor contributed equity securities worth $600,000 to Habitat for Humanity, with the stipulation that any value changes adjust the endowment, and cash investment income be used to support building projects in inner city neighborhoods in Chicago, IL. The shares declined in value by $10,000 during 2025. How is this unrealized loss reported in Habitat for Humanity’s 2025 statement of activities? a. b. c. d.
Decrease in net assets without donor restrictions Decrease in net assets with donor restrictions Direct reduction in the beginning balance of net assets Not reported
ANS:
b
Topic: Investments LO 3 How are investments in debt and equity securities valued in a private NFP organization’s financial statements? a. b. c. d. ANS:
Shown at cost; gains and losses appear on the statement of activities when the investment is sold. Shown at market; unrealized gains and losses are reported on the statement of financial position and reclassified to the statement of activities when the investment is sold. Shown at market; unrealized gains and losses are reported on the statement of activities as market value changes. Shown at cost; gains and losses are reported on the statement of financial position as direct adjustments of net assets without donor restrictions when the investment is sold. c
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-23
70.
Topic: Hedge investments LO 3 Make-A-Wish Foundation invests in derivatives hedging the price risk of forecasted transactions. Unrealized gains on these derivatives are: a. b.
d.
Reported on the Foundation’s statement of activities as part of its change in net assets Reported on the Foundation’s statement of financial position in a separate category between liabilities and net assets Reported on the Foundation’s statement of activities as an offset to losses on the forecasted transactions Not reported
ANS:
a
c.
71.
Topic: Hedge investments LO 3 What is an accurate statement regarding required NFP reporting of derivatives used to hedge forecasted transactions? a. b. c. d. ANS:
72.
Similar to governments, NFPs can report changes in the value of derivatives used for hedging as deferred inflows/outflows on the balance sheet rather than reporting gains and losses on the operating statement. Similar to businesses, NFPs can report changes in the value of derivatives used for hedging as adjustments to OCI rather than reporting gains and losses on the operating statement. NFP organizations do not report unrealized gains and losses on hedge investments. NFP reporting standards do not allow any special hedge accounting for hedges of forecasted transactions. d
Topic: Hedge investments LO 3 A private NFP organization reports interest rate swaps in the asset section of its balance sheet, at about $2 million. The organization has variable rate debt and uses the swaps to change the interest payments to fixed payments. Which statement most accurately describes the required reporting for these swaps, if interest rates fall? a. b. c. d. ANS:
Unrealized losses on the swaps are reported in the statement of activities. Unrealized losses on the swaps are reported as deferred outflows in the statement of financial position. Unrealized gains on the swaps are reported in the statement of activities. Unrealized gains on the swaps are reported as deferred inflows on the statement of financial position. a
©Cambridge Business Publishers, 2023 13-24
Advanced Accounting, 5th Edition
73.
Topic: Hedge investments LO 3 A private NFP organization reports gains on interest rate swaps of approximately $60,000. The organization has variable rate debt and uses the swaps to change the interest payments to fixed payments. Which statement best reflects the organization’s reporting for these swaps? a. b. c. d. ANS:
74.
d
Topic: NFP mergers LO 4 Two NFP organizations form a new entity, which takes control of the activities of both organizations. How are the assets of the new entity valued? a.
c. d.
One organization is identified as the acquiring organization, and its assets are revalued to fair value at the date of acquisition; the acquired organization’s assets remain at book value. One organization is identified as the acquired organization, and its assets are revalued to fair value at the date of acquisition; the acquiring organization’s assets remain at book value. The assets of both organizations are revalued to fair value at the date of acquisition. Assets are reported at the values carried on the books of each of the two organizations.
ANS:
d
b.
75.
The gains appear in the statement of financial position as a component of other comprehensive net assets. The gains appear on the statement of financial position as deferred inflows. The gains appear in the statement of activities as an increase in net assets with donor restrictions. The gains are reported in the statement of activities as an increase in net assets without donor restrictions.
Topic: NFP mergers LO 4 NFP organization A takes control of NFP organization B in a transaction categorized as an acquisition. A pays $60 million in cash to acquire B. B relies primarily on donations to fund its operations. The fair value of B’s identifiable net assets is $35 million, and the book value of B’s identifiable net assets is $20 million. A’s entry to record its acquisition of B will include a debit of: a. b. c. d.
$20 million to identifiable net assets. $25 million to goodwill. $40 million to goodwill. $25 million as a charge against net assets.
ANS:
d
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-25
76.
77.
78.
Topic: NFP mergers LO 4 NFP organization A takes control of NFP organization B in a transaction categorized as an acquisition. A pays $60 million in cash to acquire B. B operates like a business, charging fees to cover costs. The fair value of B’s identifiable net assets is $35 million, and the book value of B’s identifiable net assets is $20 million. A’s entry to record its acquisition of B will include a debit of: a. b. c. d.
$20 million to identifiable net assets. $25 million to goodwill. $40 million to goodwill. $25 million as a charge against net assets.
ANS:
b
Topic: Private colleges and universities LO 4 A private college or university reports tuition waivers for teaching assistants as: a. b. c. d.
An expense A reduction in tuition revenue A reduction in net assets with donor restrictions A reduction in net assets without donor restrictions
ANS:
a
Topic: Statement of activities; colleges and universities LO 4 A university reports the following information: Gross tuition billings to students Tuition scholarships granted to students Tuition waivers for teaching assistants Estimated uncollectible tuition revenue
$80,000,000 25,000,000 10,000,000 1,000,000
On the university’s statement of activities, net tuition revenue is: a. b. c. d.
$45,000,000 $70,000,000 $79,000,000 $55,000,000
ANS:
d $80,000,000 - $25,000,000 = $55,000,000
©Cambridge Business Publishers, 2023 13-26
Advanced Accounting, 5th Edition
79.
Topic: Statement of activities; colleges and universities LO 4 A university reports the following information: Gross tuition billings to students Tuition scholarships based on high school academic performance Need-based tuition scholarships Tuition waivers for teaching assistants Tuition waivers for students employed in the student union Estimated uncollectible tuition revenue
$35,000,000 2,000,000 8,000,000 3,000,000 900,000 500,000
On the university’s statement of activities, net tuition revenue is: a. b. c. d.
$34,500,000 $20,600,000 $25,000,000 $21,100,000
ANS:
c $35,000,000 - $2,000,000 - $8,000,000 = $25,000,000
Use the following information to answer Questions 80 and 81: A hospital reports the following information: Estimated bad debts—non-charity patients Contractual adjustments—third party payors Direct gross billings to non-charity patients Gross billings to insurance companies and Medicare/Medicaid Charity care, estimated billing value Charity care, cost 80.
$ 600,000 2,000,000 6,000,000 20,000,000 2,500,000 1,500,000
Topic: Statement of activities, hospitals LO 4 Net patient service revenue, as reported on the hospital’s statement of activities, is: a. b. c. d.
$25,400,000 $24,000,000 $20,500,000 $19,500,000
ANS:
b $6,000,000 + $20,000,000 – $2,000,000 = $24,000,000
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-27
81.
82.
83.
84.
Topic: Statement of activities, hospitals LO 4 Charity care is reported on the hospital’s statement of activities as: a. b. c. d.
Revenue of $1,500,000 and expense of $1,500,000 Revenue of $2,500,000 and bad debt expense of $1,500,000 Revenue of $2,500,000 and expense of $1,500,000 Expense of $1,500,000
ANS:
d Charity care is reported at cost.
Topic: Health care organizations LO 4 For which type of private NFP organization does ASC Topic 954 require a standardized performance measure on its statement of activities? a. b. c. d.
Voluntary health and welfare organizations Colleges and universities Health care organizations Professional organizations
ANS:
c
Topic: Health care organizations LO 4 The intermediate performance indicator reported on the statement of activities of health care organizations, as specified by ASC Topic 954, excludes a. b. c. d.
Unrealized gains and losses on investments in equity securities. Defined pension benefits earned by current employees. Impairment losses on intangible assets. Contributions of long-lived assets.
ANS:
d
Topic: Health care organizations LO 4 The intermediate performance indicator reported on the statement of activities for health care organizations, as specified by ASC Topic 954, excludes a. b. c. d.
Unrealized gains and losses on hedge investments. Depreciation expense on buildings and equipment. Investment income. Interest expense on long-term debt.
ANS:
a
©Cambridge Business Publishers, 2023 13-28
Advanced Accounting, 5th Edition
85.
Topic: Health care organizations LO 4 The intermediate performance indicator reported on the statement of activities for health care organizations, as specified by ASC Topic 954, includes a. b. c. d.
Unrealized gains and losses on hedge investments. Pension/OPEB expenses other than for current service. Impairment losses on long-lived assets. Unrealized gains and losses on non-trading debt securities.
ANS:
c
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-29
PROBLEMS 1.
Topic: Statement of activities LO 1 Below are balances pertaining to the activities of the Webster Center for the Performing Arts, a private NFP organization, for the current year. All items affect net assets without donor restrictions. Box office receipts $ 17,500,000 Theater revenues 11,000,000 Contributions and special event receipts 800,000 Interest expense 25,000 Theater expenses 29,000,000 General and administrative expenses 2,600,000 Education and community programming expenses 980,000 Fundraising expenses 525,000 Net assets released from restrictions 3,000,000 Unrealized losses on investments 50,000 Investment income 675,000 Required Prepare the year’s statement of activities for the Webster Center for the Performing Arts, in good form. In its statement of activities, the Center displays an operating and nonoperating section and reports expenses functionally. ANS: Webster Center for the Performing Arts Statement of Activities For the current year Operating revenues: Box office receipts Theater revenues Contributions and special event receipts Net assets released from restrictions Total operating revenues
$ 17,500,000 11,000,000 800,000 3,000,000 32,300,000
Operating expenses: Theater expenses Education and community programming expenses General and administrative expenses Fundraising expenses Total operating expenses Decrease in net assets without donor restrictions from operations
29,000,000 980,000 2,600,000 525,000 33,105,000 (805,000)
Nonoperating items: Interest expense Investment income Unrealized losses on investments Increase in net assets without donor restrictions from nonoperating items Decrease in net assets without donor restrictions
(25,000) 675,000 (50,000) 600,000 (205,000)
©Cambridge Business Publishers, 2023 13-30
$
Advanced Accounting, 5th Edition
2.
Topic: Financial statements LO 1 Below are balances pertaining to the activities of the Humane Society, a private NFP organization, for the current year (in millions). Animal protection program expenses Cash and cash equivalents, end of year Fixed assets and conservation property, net of depreciation, end of year Liabilities, end of year Supporting services expenses: management and general Supporting services expenses: fundraising Investments, at market value, end of year Receivables, end of year Contributions and grants—unrestricted Gains on investments—unrestricted Contributions and grants—restricted Prepaid expenses, end of year Net assets released from restrictions Gains on investments—restricted Bequests and other income—restricted Bequests and other income—unrestricted Net assets without donor restrictions, beginning of year Net assets with donor restrictions, beginning of year
$131.4 30.6 30.6 35.8 12.0 36.4 408.3 19.3 120.3 24.2 24.1 1.8 34.2 6.0 4.5 133.0 221.5 101.0
Required Prepare the year’s statement of activities and the year-end statement of financial position for the Humane Society, in good form. The Society does not display an intermediate performance measure. ANS: The Humane Society Statement of Activities Without donor restrictions Support and revenue Contributions and grants Bequests and other income Gains on investments Net assets released from restrictions Total support and revenue Program and supporting expenses Animal protection program expenses Supporting services: Management and general Supporting services: fundraising Total program and supporting expenses Change in net assets Beginning net assets Ending net assets
Test Bank, Chapter 13
With donor restrictions
Total
$120.3 133.0 24.2 34.2 311.7
$24.1 4.5 6.0 (34.2) 0.4
$144.4 137.5 30.2 -312.1
131.4 12.0 36.4 179.8 131.9 221.5 $353.4
----0.4 101.0 $101.4
131.4 12.0 36.4 179.8 132.3 322.5 $454.8
©Cambridge Business Publishers, 2023 13-31
The Humane Society Statement of Financial Position Assets Liabilities Cash and cash equivalents $ 30.6 Net assets Receivables 19.3 Without donor restrictions Prepaid expenses 1.8 With donor restrictions Investments 408.3 Total net assets Fixed assets and conservation property, net 30.6 Total liabilities and net Total assets $490.6 assets 3.
$ 35.8 353.4 101.4 454.8 ____ $490.6
Topic: Statement of cash flows LO 1 Below are items related to the financial performance of Open Door Mission for the current year. Decrease in net assets Contribution of long-lived assets Unrealized gains on investments Increase in pension liability Contribution of marketing services Decrease in contributions receivable Contribution of contracting services for new facilities Increase in inventories Loss on sale of equipment Depreciation and amortization Decrease in accounts payable
$ 25,000 10,000 1,000 20,000 5,000 12,000 9,000 2,000 500 65,000 650
Required Prepare the operating section of Open Door Mission’s statement of cash flows for the current year, using the indirect method. ANS:
Cash from operating activities Decrease in net assets Contribution of long-lived assets Unrealized gains on investments Increase in pension liability Decrease in contributions receivable Contribution of services for new facilities Increase in inventories Loss on sale of equipment Depreciation and amortization Decrease in accounts payable Cash from operating activities
©Cambridge Business Publishers, 2023 13-32
$ (25,000) (10,000) (1,000) 20,000 12,000 (9,000) (2,000) 500 65,000 (650) $ 49,850
Advanced Accounting, 5th Edition
4.
Topic: Statement of cash flows LO 1 Current year cash receipts and disbursements for La Jolla Reptile Park, a private NFP organization, appear below. 1. Cash receipts from park guests, $350,000. 2. Cash contributions from friends of the park, $15,000. 3. Collections of documented pledges of contributions, $2,000. 4. Cash endowments donor-restricted in perpetuity, $35,000. 5. Grant received from a private trust, restricted to programs to protect reptiles, $2,500. $2,350 is spent on these programs. 6. Cash paid to acquire equipment, $18,000. 7. Cash invested in securities, $24,000. Cash received from the sale of securities, $4,000. 8. Donor-restricted cash accumulated in prior years, spent for programs: $8,000; spent for equipment, $20,000. 9. Program, fund-raising and administrative expenses not described above were $362,000; accounts payable increased $400 during the year, and depreciation included in expenses was $14,000. 10. Investment income was $9,000; consisting of cash received and $200 in unrealized losses. Required Prepare a statement of cash flows for La Jolla Reptile Park, in good form. The beginning cash balance was $4,000, and the direct method is used for cash from operating activities. ANS: La Jolla Reptile Park Statement of Cash Flows Cash flows from operating activities Receipts from park guests Contributions ($15,000 + 2,000) Grant Investment income ($9,000 + $200) Program expenditures ($2,350 + $8,000 + $347,600*) Net cash from operating activities Cash flows from investing activities Equipment purchases ($18,000 + $20,000) Investment purchases Sale of investments Net cash used for investing activities Cash flows from financing activities Endowments Net cash from financing activities Decrease in cash Beginning cash balance Ending cash balance
$ 350,000 17,000 2,500 9,200 (357,950) 20,750 (38,000) (24,000) 4,000 (58,000) 35,000 35,000 (2,250) 4,000 $ 1,750
* $347,600 = $362,000 - $400 - $14,000. Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-33
5.
Topic: Statement of cash flows LO 1 Frontenac University is a private NFP university. Information on its activities for the current year are as follows (in thousands): Increase in net assets without donor restrictions Endowment contributions Loss on disposal of property Decrease in net assets with donor restrictions Unrealized gains on investments Realized gains on investments Decrease in current liabilities Depreciation and amortization Increase in contributions receivable, net
15,000 8,000 250 1,600 4,000 600 1,800 6,000 200
Required Prepare the operating section of Frontenac University’s statement of cash flows, using the indirect method. ANS: Frontenac University Statement of Cash Flows Operating Section
(in thousands) Cash flows from operating activities: Increase in net assets ($15,000 - $1,600) Depreciation and amortization Loss on disposal of property Realized gains on investments Unrealized gains on investments Increase in contributions receivable, net Decrease in current liabilities Endowment contributions Cash provided by operating activities
©Cambridge Business Publishers, 2023 13-34
$ 13,400 6,000 250 (600) (4,000) (200) (1,800) (8,000) $ 5,050
Advanced Accounting, 5th Edition
6.
Topic: Reporting contributions and expenses LO 2 The New Cumberland Food Ministry (private NFP organization) receives the following donations: 1. 2. 3. 4. 5. 6. 7.
A donor contributes $5,000 cash, with no restrictions or conditions. An electrician provides services valued at $20,000 to modernize the ministry’s wiring and heating. An accountant provides payroll services valued at $3,000. Volunteers provide services valued at $1,500 in warehousing and delivering food. A donor signs an agreement promising to contribute cash in three years, and specifying that the contribution be used to acquire an additional food distribution site in a neighboring town. The present value of the donation is $25,000. A donor contributes a delivery van, valued at $18,000, with no restrictions as to use. A donor contributes $35,000 in cash, specifying that it be used to support nutritional programs open to the community.
Required For each item, indicate whether it affects net assets without donor restrictions and/or net assets with donor restrictions, and the account title(s) and amount(s), if any. ANS: 1. 2. 3. 4. 5. 6. 7. 7.
Net assets without donor restrictions, contributions revenue +$5,000 Net assets without donor restrictions, contributions revenue +$20,000 Net assets without donor restrictions, service contributions, +$3,000; administrative expenses, -$3,000 no effect (not recorded) Net assets with donor restrictions, contributions revenue +$25,000 Net assets without donor restrictions, in-kind contributions revenue +$18,000 Net assets with donor restrictions, contributions revenue +$35,000
Topic: Reporting contributions and expenses LO 2 Golden State Youth Camp is a private NFP organization that provides camping experiences to children with chronic health issues. Contributions provide the major support for its programs. During the current year, the following contributions were received: 1. 2. 3. 4. 5. 6.
$100,000 in cash was received from a campaign to finance construction of a new kitchen. $5,000 in cash was received from friends of the camp, with no restrictions. A registered nurse donated services valued at $6,000 for part of the summer. Food with a fair value of $15,000 was donated by local grocery stores. Cost to the stores was $12,000. A local television station donated free advertising spots providing information on the camp. The normal charge is $5,000. College students donated services valued at $20,000 to serve as camp counselors.
Required Prepare the journal entry to record each contribution. If the account used affects net assets, indicate whether net assets with donor restrictions or without donor restrictions is affected. Use N/A to indicate if no entry is appropriate.
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-35
ANS: 1. Restricted cash
100,000 Contributions revenue— restricted
2. Cash
100,000
5,000 Contributions revenue— unrestricted
3. Program expense (reduces unrestricted net assets)
5,000
6,000 Service contributions revenue—unrestricted
4. Supplies
6,000
15,000 Supplies contributions revenue—unrestricted
5. Administrative expense (reduces unrestricted net assets)
15,000
5,000 Service contributions revenue—unrestricted
6. 8.
5,000
N/A
Topic: Reporting contributions and expenses LO 2 Grand View University, a private NFP university, receives the following donations: 1.
2.
3. 4. 5.
A parent of a current accounting student contributes $500,000 with the stipulation that the donation be used to partially fund a new accounting study area within the business school. The college does not know whether it can accumulate enough additional resources to go ahead with the project. An accounting alumnus contributes $200,000 to the accounting department. The alumnus stipulates that the principal of the contribution remain intact, and any investment income received in cash must be used to fund a semiannual speaker series on data analytics topics. The college invests the $200,000 in securities, and reports investment income of $7,000, received in cash. The $7,000 will be used to fund speaker transportation and fees next year. A retired recruiter from a local CPA firm notifies the college that her will states that $600,000 of her estate will be paid to the accounting department of the college, with no restrictions on use. A friend of the accounting department donates furniture valued at $30,000, to be used in department conference rooms. The furniture in item 4. depreciates by $3,000.
©Cambridge Business Publishers, 2023 13-36
Advanced Accounting, 5th Edition
6.
Alumni and friends contribute $100,000 to the accounting department. The chair of the department sets aside $30,000 of these contributions to fund faculty continuing education activities.
Required Prepare the journal entry to record each contribution. If the account used affects net assets, indicate the category of net assets that is affected. Use N/A to indicate if no entry is appropriate. ANS: 1. Restricted cash Refundable contributions (liability) 2. Restricted cash Contributions revenue—restricted Investment in securities Restricted cash Cash
500,000 500,000
200,000 200,000 200,000 200,000 7,000
Investment income—restricted
7,000
3. No entry; donor could change her mind. 4. Equipment Contributions revenue—restricted
30,000
5. Net assets released from restrictions—restricted Net assets released from restrictions—unrestricted
3,000
Depreciation expense (reduces unrestricted net assets) Accumulated depreciation, equipment 6. Cash
30,000
3,000 3,000 3,000
100,000 Contributions revenue—unrestricted
100,000
No entry to record the amount set aside. However, the $30,000 could be disclosed as a category of NA without restrictions.
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-37
9.
Topic: Promises of contributions LO 2 At the beginning of 2023, Hawkland Cultural Museum, a private NFP organization, receives a documented promise to contribute $20,000 at the end of each year for the next three years. The donor specifies that the contribution be used for free education programs for community youth. The promise is considered fully collectible, the appropriate discount rate is 4%, and the present value of the promise is $55,500. At the end of 2023, the museum receives the first payment. During 2024, $15,000 is spent on education programs, and the second payment is received. Required Prepare journal entries to record activities related to the promise during 2023 and 2024. If the museum’s net assets are affected, indicate the appropriate category of net assets. Round answers to the nearest dollar if necessary. ANS: 2023 Contributions receivable Contribution revenue—restricted Discount on contributions receivable
60,000 55,500 4,500
Discount on contributions receivable Contribution revenue—restricted $2,220 = 4% x $55,500
2,220
Cash
20,000
2,220
Contributions receivable 2024 Net assets released from restrictions—restricted Net assets released from restrictions—unrestricted
20,000
15,000 15,000
Program expenses (reduces net assets without restrictions) Cash
15,000
Discount on contributions receivable Contribution revenue—restricted $1,509 = 4% x ($55,500 + $2,220 - $20,000)
1,509
Cash
20,000 Contributions receivable
©Cambridge Business Publishers, 2023 13-38
15,000
1,509
20,000
Advanced Accounting, 5th Edition
10.
Topic: Promises of contributions LO 2 On January 2, 2023, a donor makes a documented promise to contribute $2,000,000 to an NFP organization on December 31, 2024. There are no restrictions on the use of the contribution. On December 31, 2024, the organization receives the $2,000,000 in cash. The appropriate riskadjusted discount rate is 4.5%, and the present value of the promise on January 2, 2023, is $1,831,460. The organization’s accounting year ends December 31. Required Prepare the journal entries to record this contribution in 2023 and 2024. Include any necessary year-end adjusting entries. For accounts that appear on the statement of activities, specify which category of net assets is affected. Round answers to the nearest dollar if necessary. ANS: January 2, 2023 Contributions receivable
2,000,000 Discount on contributions receivable Contributions revenue— unrestricted
December 31, 2023 Discount on contributions receivable
168,540 1,831,460
82,416 Contributions revenue— unrestricted
82,416
4.5% x $1,831,460 = $82,416 December 31, 2024 Discount on contributions receivable
86,124
Contributions revenue-unrestricted 4.5% x ($1,831,460 + $82,416) = $86,124 Cash
2,000,000 Contributions receivable
Test Bank, Chapter 13
86,124
2,000,000
©Cambridge Business Publishers, 2023 13-39
11.
Topic: Promises of contributions with estimated uncollectibles LO 2 At the beginning of the year, the Dorado Museum of Natural History, a private NFP organization, receives a documented promise to contribute $100,000 at the end of each year for the next four years. The museum estimates that 5% of each year’s promised contribution is uncollectible, and reports the promise as donor-restricted. The appropriate discount rate is 6%. At the end of the year, the museum receives the first payment, in full. However, it is now expected that only 90% of each of the remaining payments will be collected. Required Prepare journal entries to record the promise and the first year’s contribution, as well as any adjusting entries. For accounts shown on the statement of activities, indicate the category of net assets affected. Round your answers to the nearest dollar if appropriate. ANS: Contributions receivable ($95,000 x 4) Contributions revenue—restricted Discount on contributions receivable $329,185 = present value of $95,000/yr. for 4 years at 6%.
380,000
Discount on contributions receivable Contributions revenue—restricted $19,751 = $329,185 x 6%.
19,751
Cash
100,000
329,185 50,815
19,751
Contributions receivable
100,000
At the end of the year, the present value of the remaining promise is the present value of $90,000/yr. for 3 years at 6% = $240,571. Therefore, contributions receivable should be ($90,000 x 3) = $270,000 and the discount balance should be $270,000 - $240,571 = $29,429. The unadjusted balance for contributions receivable = $280,000 and the unadjusted discount balance is $31,064. Therefore, the adjusting entry is: Discount on contributions receivable Loss on promised contributions—restricted Contributions receivable
©Cambridge Business Publishers, 2023 13-40
1,635 8,365 10,000
Advanced Accounting, 5th Edition
12.
Topic: Promises of contributions with estimated uncollectibles LO 2 On July 1, 2023, the Society for Environmental Sustainability, a private NFP organization, received the following documented commitments from potential donors: 1. 2.
$100,000 to be paid on June 30, 2024. There are no donor restrictions on the use of the donations, and the Society estimates that the donations are 95% collectible. $200,000 to be paid on June 30, 2025. These donations are donor-restricted to specific Society projects. The Society estimates that the donations are 85% collectible and specifies a discount rate of 3.2%.
Subsequent activity for each donation is as follows: Donation 1. The Society received $95,000 on June 30, 2024, and wrote off the remainder of the donation. Donation 2. On June 30, 2024, the Society revised the expected donation to $150,000. In fiscal 2025 it received $80,000 and wrote the remaining donation off as uncollectible. Required Prepare the necessary journal entries for each commitment for fiscal 2024 and 2025. The Society’s fiscal year ends June 30. ANS: Donation 1 July 1, 2023 Contributions receivable Bad debt expense Allowance for uncollectible contributions Contribution revenue—unrestricted June 30, 2024 Cash Allowance for uncollectible contributions Contributions receivable
100,000 5,000 5,000 95,000
95,000 5,000 100,000
Donation 2 July 1, 2023 Contributions receivable 170,000 Discount on contributions receivable Contribution revenue—restricted $170,000 = 85% x $200,000; $159,621 is the present value of $170,000 received in 2 years at 3.2%.
Test Bank, Chapter 13
10,379 159,621
©Cambridge Business Publishers, 2023 13-41
The estimated promise is revised to $150,000 due in one year, present value = $145,349. Adjusting entry: June 30, 2024 Discount on contributions receivable Contribution revenue—restricted Contributions receivable
5,728 14,272 20,000
Note: The contribution is restricted so no expense can be recorded; choices are a reduction in restricted revenue or recognition as a loss, reducing restricted net assets. June 30, 2025 Cash Discount on contributions receivable Contribution revenue—restricted Contributions receivable 13.
80,000 4,651 65,349 150,000
Topic: In-kind and service contributions LO 2 Hampden Soccer Association, a private NFP organization, receives the following donations during the year: 1. 2. 3. 4.
Supplies with a market value of $7,000 were received from a local sporting goods store. Volunteers prepared the soccer fields for summer play. The fair value of their time was $4,000. A CPA contributed services valued at $2,000 to prepare Form 990. A contractor contributed services valued at $10,000 to build a new picnic area.
Required Prepare journal entries to record the events described for the current year. If an account affects net assets, indicate which category of net assets is affected. Use N/A to indicate if no entry is appropriate. ANS: 1. Supplies In-kind contributions revenue—unrestricted
7,000 7,000
2. N/A 3. Administrative expense (reduces unrestricted net assets) Contributions of services—unrestricted
2,000
4. Facilities (long-lived asset) Contributions of services—unrestricted
10,000
©Cambridge Business Publishers, 2023 13-42
2,000
10,000
Advanced Accounting, 5th Edition
14.
Topic: Contribution of services LO 2 The following services, with fair values indicated, were contributed to the Vero Beach Museum of Art, a private NFP organization: Cost of repaving the parking lot, provided by a local paving company……….. $40,000 Community volunteers providing maintenance services……………………………. 5,000 Engineers and electricians working on major updates of facilities……………... 50,000 Legal and consulting services provided by lawyers and CPAs……………..………. 20,000 Local residents working as event coordinators……………..…………………………….. 1,000 Required Prepare the journal entry or entries to record these donated services. If the account affects net assets, indicate which category of net assets is affected. ANS: Administrative expenses (1) Facilities (asset)
60,000 50,000 Contributed services— unrestricted
110,000
(1) $40,000 + $20,000 = $60,000; expenses reduce unrestricted net assets.
Repaving is a maintenance expense. Major facilities updates are capitalized. Services of volunteers and local residents do not qualify as reportable donated services. 15.
Topic: Endowment contributions LO 2 The Appalachian Avian Society has a $10 million permanent endowment contributed by enthusiastic bird watchers. Investment income and realized and unrealized gains and losses are donor-restricted for programs for the protection of blue-winged warblers. During the year, dividends and interest received in cash on endowment investments totaled $160,000, and unrealized gains on investments held at year-end were $45,000. Endowment income spent on warbler programs totaled $195,000. These costs included $25,000 in depreciation on facilities used. Cash paid for the programs was $172,000. Required Prepare journal entries to record the events described for the current year. If an account affects net assets, indicate which category of net assets is affected. ANS: Cash
160,000 Investment income—restricted
160,000
Investments Unrealized gains—restricted
45,000
Net assets released from restrictions—restricted Net assets released from restrictions—unrestricted
195,000
Test Bank, Chapter 13
45,000
195,000 ©Cambridge Business Publishers, 2023 13-43
Program expenses (reduces unrestricted net assets) Accounts payable Cash Accumulated depreciation 16.
195,000 2,000 172,000 25,000
Topic: Contributions of long-lived assets LO 2 At the beginning of the year, a donor gave the World Wildlife Fund a building with a fair value of $15 million. The donor specified that the building must be used by World Wildlife fund for at least five years. The facility has a useful life of 25 years. Required Prepare journal entries to record the events described for the year. If an account affects net assets, indicate which category of net assets is affected. ANS: Building Contributions revenue—restricted
15,000,000
Net assets released from restrictions—restricted Net assets released from restrictions—unrestricted $3,000,000 = $15,000,000/5.
3,000,000
Depreciation expense (reduces unrestricted net assets) Accumulated depreciation $600,000 = $15,000,000/25 17.
15,000,000
3,000,000
600,000 600,000
Topic: Contributions of long-lived assets LO 2 In 2023, Farm Sanctuary’s capital campaign raised $500,000 in cash for a new barn at its sanctuary for rescued farm animals in Watkins Glen, NY. Construction began in 2024 and the barn was completed at a cost of $500,000 and placed into service on July 1, 2024. The barn’s estimated useful life is 25 years, and Farm Sanctuary’s accounting year ends December 31. Required Prepare journal entries to record the events described for 2023 and 2024. If an account affects net assets, indicate which category of net assets is affected. ANS: 2023 Restricted cash Contributions revenue—restricted
500,000
2024 Net assets released from restrictions—restricted Net assets released from restrictions—unrestricted
500,000
©Cambridge Business Publishers, 2023 13-44
500,000
500,000
Advanced Accounting, 5th Edition
18.
Buildings Restricted cash
500,000
Depreciation expense (reduces unrestricted net assets) Accumulated depreciation $10,000 = ½ x ($500,000/25).
10,000
500,000
10,000
Topic: Contributions of long-lived assets LO 2 An alumnus of Cedar Valley University donates a building with a fair value of $15 million. The only donor restriction is that the university must use the building for business school activities for at least five years. Building has an estimated remaining life of 30 years, with no residual value. Straight-line depreciation is appropriate. Cedar Valley plans to use the building for its new MS in Accounting program, offered on a part-time basis to working professionals. Depreciation on the building is allocated as follows: 75% to programs and 25% to administration. Required Prepare the journal entries to record the donation and the first year’s depreciation on the building. If an entry affects net assets, indicate which category of net assets is affected. ANS: Record the donation: Building, net
15,000,000 Contribution revenue— restricted
Record satisfaction of one year of five-year use restriction: Net assets released from restrictions—restricted Net assets released from restrictions—unrestricted Record depreciation expense for the year: Program expenses (reduces unrestricted net assets) Administrative expenses (reduces unrestricted net assets) Building, net
Test Bank, Chapter 13
15,000,000
3,000,000 3,000,000
375,000 125,000 500,000
©Cambridge Business Publishers, 2023 13-45
19.
Topic: Split-interest agreement, charitable remainder trust LO 2 At the beginning of the current year, Tarrah Waverly gave the Aspen Museum $500,000 in cash, with the provision that the cash be invested in income-producing securities. The museum is to pay Tarrah $35,000 at the end of each year for her remaining life. Upon her death, remaining resources become available to the museum with no restrictions as to use. The museum invested the $500,000 in securities earning cash dividend and interest income of $18,000 in the current year. The securities have a fair value of $503,000 at the end of the year. Tarrah Waverly’s life expectancy is 15 years, and the annual discount rate is 3 percent. Required Prepare journal entries to record the charitable remainder trust during the current year. If the account affects net assets, indicate which category of net assets is affected. ANS:
20.
Restricted cash Annuity payable Contribution revenue—restricted $417,828 = present value of $35,000 per year for 15 years at 3%.
500,000
Investments Restricted cash
500,000
Restricted cash Investments Annuity payable
18,000 3,000
Annuity payable Restricted cash
35,000
417,828 82,172
500,000
21,000
35,000
Topic: Split-interest agreement, charitable remainder trust, valuation change LO 2 A graduate of a local university decides to supplement his retirement income while supporting the university. On July 1, 2023, the first day of the university’s fiscal year, he donates $1,000,000 to the university under a charitable remainder trust agreement. The university will pay the donor $80,000 per year for his lifetime, on June 30 of each year. When the agreement terminates, the university has unrestricted access to the remaining assets in the trust. When signed, the donor’s life expectancy is 12 years, and the agreed discount rate is 3.75%. During fiscal 2024, investments made with the donation earn cash income of $37,000. The investments have a fair value of $1,020,000 at year-end. On June 30, 2024, the first payment is made. An actuarial evaluation determines that the donor’s life expectancy has changed to 10 years as of June 30, 2024. Required Prepare the journal entries to record the events related to the split-interest agreement for the fiscal year ending June 30, 2024. Indicate the category of net assets affected if appropriate. Round answers to the nearest dollar.
©Cambridge Business Publishers, 2023 13-46
Advanced Accounting, 5th Edition
ANS: July 1, 2023 Restricted cash 1,000,000 Annuity liability—split-interest agreement Contribution revenue—restricted $761,816 = present value of $80,000/year for 12 years at 3.75%. Investments—split-interest agreement Restricted cash
761,816 238,184
1,000,000 1,000,000
Restricted cash Investments—split-interest agreement Annuity liability—split-interest agreement
37,000 20,000
Annuity liability—split-interest agreement Restricted cash
80,000
57,000
80,000
Annuity liability—split-interest agreement 81,793 Gain on split-interest agreement—restricted 81,793 Present value of $80,000/year for 10 years at 3.75% = $657,023. $81,793 = ($761,816 + $57,000 - $80,000) - $657,023. 21.
Topic: Split-interest agreement, life income agreement LO 2 At the beginning of the current year, Tarrah Waverly gave the Aspen Museum $500,000 in cash, with the provision that the cash be invested in income-producing securities. The museum is to pay Tarrah the income from the investments, defined as dividend and interest income and unrealized gains and losses, for her remaining life. Upon her death, remaining resources become available to the college with no restrictions as to use. The museum invested the $500,000 in securities earning cash dividend and interest income of $18,000 in the current year. The securities have a fair value of $503,000 at the end of the year. Required Prepare journal entries to record the life income agreement during the current year. If the account affects net assets, indicate which category of net assets is affected. ANS: Restricted cash Contribution revenue—restricted
500,000 500,000
Investments Restricted cash
500,000
Restricted cash Investments Life income payable
18,000 3,000
Test Bank, Chapter 13
500,000
21,000
©Cambridge Business Publishers, 2023 13-47
Life income payable Restricted cash 22.
21,000 21,000
Topic: Contributions received on behalf of others LO 2 During the current year, the Dallas area United Way receives $250,000 in cash contributions that are donor-designated for Mesquite Social Services, an unaffiliated NFP organization. The Dallas United Way distributes the $250,000 to Mesquite Social Services. The Dallas United Way also receives $30,000,000 in donations that are not donor designated to a particular organization. It uses $100,000 of these donations to support Mesquite Social Services. Required Prepare the journal entries made by the Dallas United Way and Mesquite Social Services to record the above events. If the entry affects net assets, indicate which category of net assets is affected. ANS: Dallas United Way receives the contributions: Dallas United Way records: Cash
30,250,000 Liability to other organizations Contribution revenue— unrestricted
250,000 30,000,000
Mesquite Social Services accrues the designated contribution: Receivable from Dallas United Way Contribution revenue— unrestricted
250,000 250,000
United Way distributes the contributions to Mesquite Social Services: Dallas United Way records: Liability to other organizations Donor advised giving ( program expense, reduces unrestricted net assets)
250,000 100,000 Cash
Mesquite Social Services records: Cash
350,000 Receivable from Dallas United Way Contribution revenue— unrestricted
©Cambridge Business Publishers, 2023 13-48
350,000
250,000 100,000
Advanced Accounting, 5th Edition
23.
Topic: Contributions received on behalf of others LO 2 The United Way receives contributions and distributes them to other NFP organizations. Some of its transactions for the current year are as follows: 1. 2. 3.
Donors contribute $10 million, designated to specific unaffiliated NFP organizations. $8 million of this money is distributed according to donor wishes during the current year. Donors contribute $3 million, to be distributed to unaffiliated NFP organizations selected by United Way. United Way distributes $2.8 million of these donations in the current year. Donors contribute $1,000,000, to be distributed to a specific affiliated organization. United Way distributes $980,000 of these donations in the current year.
Required Prepare journal entries to record the above activities. If the item affects net assets, identify the category affected. ANS: 1. Cash
10,000,000 Liability to unaffiliated organizations
10,000,000
Liability to unaffiliated organizations Cash
8,000,000 8,000,000
2. Cash
3,000,000 Contribution revenue—unrestricted
3,000,000
Donor advised giving (program expense, reduces unrestricted net assets) Cash 3. Cash
2,800,000 2,800,000
1,000,000 Contribution revenue—restricted
1,000,000
Net assets released from restrictions—restricted Net assets released from restrictions—unrestricted
980,000 980,000
Donor advised giving (program expense, reduces unrestricted net assets) Cash
Test Bank, Chapter 13
980,000 980,000
©Cambridge Business Publishers, 2023 13-49
24.
Topic: Investments LO 3 Lakeland School, a private NFP organization, has the following equity investments at the beginning of the year: 1.
2.
3.
Securities valued at $125,000. The securities were purchased several years ago with $100,000 in cash held as a permanent endowment, as specified by the donor. Investment income received in cash is donor-restricted to specific programs. Unrealized gains and losses on the investments adjust the endowment. At year-end, the securities have a market value of $123,000. Cash dividend income for the year was $5,000. Securities valued at $50,000. The securities were contributed in a previous year; fair value at the time of donation was $45,000. The donor specified that the securities and any unrealized gains and losses were to be held as a permanent endowment, and investment income is unrestricted. At year-end, the securities have a fair value of $57,000. Cash dividend income for the year was $3,000. Securities valued at $80,000. The securities are investments of excess cash. Dividend income received in cash was $2,500, and at year-end the securities have a fair value of $81,000.
Required Prepare a schedule showing how the dividend income and unrealized gains and losses on the securities are reported on the statement of activities. For each item, identify the amount and the effect on net assets without donor restrictions and net assets with donor restrictions. ANS: Net assets without donor restrictions 1. 2. 3.
Unrealized loss Dividend income Unrealized gain Dividend income Unrealized gain Dividend income
©Cambridge Business Publishers, 2023 13-50
Net assets with donor restrictions $(2,000) 5,000 7,000 $3,000 -1,000 2,500
Advanced Accounting, 5th Edition
25.
Topic: Investments LO 3 Northeast Health Services, a not-for-profit private community organization, holds long-term investments at the beginning of the current year as follows:
Investment in debt securities Investment in IBM equity securities Investment in Apple equity securities
Market Value $ 600,000 500,000 700,000
The debt securities were donated several years ago. The donor specified that the securities be held as a permanent endowment, with cash investment income to be used for nutrition counseling. The securities were worth $590,000 at the date of donation. The IBM shares were purchased for $465,000 in cash donated as a permanent endowment. The donor did not specify any constraints on investment income or gains and losses, but the Board has a policy of using investment income on this endowment to help finance free infant immunizations in low-income neighborhoods. The Apple shares were purchased for $640,000 in cash donated as a permanent endowment. The donor specified that investment income and gains and losses be used for exercise programs. Income on these investments for the year, and year-end market values are as follows:
Investment in debt securities Investment in IBM securities Investment in Apple securities
Investment Income $ 12,000 25,000 5,000
Year-End Market Value $ 604,000 520,000 650,000
Required Show how the events of the year are disclosed in Northeast’s statement of activities, specifying the effect on each category of net assets. ANS:
Debt securities investment income IBM investment income Apple investment income Unrealized gain—debt securities Unrealized gain—IBM shares Unrealized loss—Apple shares
Test Bank, Chapter 13
Change in Net assets Net assets without with donor donor restrictions restrictions $ 12,000 $ 25,000 5,000 4,000 20,000 (50,000)
©Cambridge Business Publishers, 2023 13-51
26.
Topic: Recording various transactions LO 1, 2, 3 Below are some of the New York State Society of CPAs (NYSSCPA) transactions for 2024. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
The organization receives cash contributions for general use. Cash contributions donor-designated for support of programs promoting the accounting profession among high school students are received. A large cash balance has accumulated, and the Board of Directors decides to designate it for undergraduate scholarships. Excess cash is invested in low-risk interest-bearing securities. Interest income is earned on the securities in 4. In 2023, a donor signed a contract promising to contribute $1,000,000 to the NYSSCPA at the end of five years. The contract was reported at present value, using an appropriate discount rate. Promises are reported as restricted. A contractor provides volunteer services to build new office facilities. A donor gives $1,000,000 to the NYSSCPA. The donor specifies that the endowment cannot be spent, but cash income from its investment is to be used for scholarships. NYSSCPA makes principal payments on its capital lease obligations. Interest income is earned and received in cash on investments made with the endowment money described in 8. above.
Required For each item above, indicate what category of net assets it affects on the NYSSCPA 2024 statement of activities, if any. Use the abbreviations listed below. Net assets without donor restrictions (NR) Net assets with donor restrictions (R) Does not affect net assets (N/A) ANS: 1. 2. 3. 4. 5.
NR R N/A N/A NR
6. 7. 8. 9. 10.
©Cambridge Business Publishers, 2023 13-52
R NR R N/A R
Advanced Accounting, 5th Edition
27.
Topic: Recording various transactions LO 1, 2, 3 Below are some of Habitat for Humanity’s transactions for 2024. a. A local business promises to match any contributions received over $1 million. Contributions have not yet reached that level. b. Students donate their time to help with construction of houses. c. A donor makes a donor-restricted documented pledge to make a donation in a future year. d. A citizen donates $2 million. The principal is to remain intact, and the income from investment of the principal is restricted to building houses in Missouri. Investments are made, but no income has yet been earned. e. An individual donates $100,000 for building houses in Southern California. f. Employees earn compensation. g. Excess cash is invested in low-risk securities. h. Contributions received in 2023, donor-designated for projects in Montana, are spent in 2024 on items categorized as program expenses. i. A CPA donates her time to prepare Habitat for Humanity’s tax forms and financial statements. j. During a calling campaign, Habitat for Humanity receives pledges from the public. Required Below is a list of categories on Habitat for Humanity’s 2024 statement of activities. 1. 2. 3. 4. 5. 6.
Contributions revenue—unrestricted Contributions revenue—restricted Expenses—reduction in net assets without restrictions Net assets released from restrictions–restricted Net assets released from restrictions–unrestricted Does not appear on the statement of activities
For each of the transactions a – j above, indicate where it appears, if at all, on the statement of activities. The item may be reported in one category or more than one category. Use the numbers 1-5 to indicate the item’s location(s). Use number 6 to indicate that the item does not appear on the statement of activities. ANS: a. b. c. d. e.
6 6 2 2 2
Test Bank, Chapter 13
f. g. h. i. j.
3 6 3, 4, 5 1, 3 6
©Cambridge Business Publishers, 2023 13-53
28.
Topic: Statement of activities LO 1, 2, 3 Transactions for the Smithsonian Geographic Society during the current year are as follows: 1. General cash contributions received: $600,000. 2. Cash contributions restricted to workshops on endangered tortoises: $30,000. 3. A successful scientist contributed $90,000 in cash as a permanent endowment. The income from investments of this contribution can be used for general operations. 4. Investment income earned on the contribution in Item 3 is $4,000. There is no change in fair value of the related investments. 5. Documented pledges are recorded, having a present value of $95,000. Pledges are recorded as restricted. 6. Increase during the year in the present value of recorded pledges: $5,000. 7. Cash received from previously recorded pledges: $25,000. 8. Expenses incurred: Programs………………………………………………. $700,000 Administration……………………………………… 60,000 Fund-raising…………………………………………. 15,000 9. Included in programs expenses in Item 8 is $175,000 spent for workshops, using cash contributions from the past that were restricted for workshop support. 10. Beginning balances of net assets are as follows: Net assets without donor restrictions……… $ 80,000 Net assets with donor restrictions…………… 65,000 Required Prepare the Smithsonian Geographic Society’s statement of activities for the current year. ANS: SMITHSONIAN GEOGRAPHIC SOCIETY Statement of Activities For the Year Net assets without donor restrictions Revenues and support Contributions $600,000 Investment income 4,000 Pledges Net assets released from restrictions 175,000 Total revenue and support 779,000 Expenses Programs 700,000 Administration 60,000 Fund-raising 15,000 Total expenses 775,000 Change in net assets 4,000 Beginning net assets 80,000 Ending net assets $ 84,000
©Cambridge Business Publishers, 2023 13-54
Net assets with donor restrictions $120,000 100,000 (175,000) 45,000
______ 0 45,000 65,000 $110,000
Advanced Accounting, 5th Edition
29.
Topic: Statement of activities, statement of cash flows LO 1, 2, 3 The Lancaster Relief Foundation (LRF) is a privately funded voluntary health and welfare organization. Its trial balance at the beginning of the year is as follows:
Cash Contributions receivable Investments Buildings & equipment, net Accounts payable Net assets without donor restrictions Net assets with donor restrictions Total
Dr (Cr) $ 395 460 200 540 (160) (680) (755) $ 0
The following events occurred during the year: 1.
Cash contributions of $3,000 were received. They consist of: (a) $1,500 received from the public as general contributions, (b) $600 received from a grant to support programs to finance higher education for single parents, and (c) $900 received as a permanent endowment; this money was invested in securities, and the donor specified that investment income and unrealized gains and losses are to be used to support LRF’s programs to provide tutoring in the public schools.
2.
LRF received payments of $50 on contribution promises made in previous years. The present value of these promises increased by $35. Additional documented promises, with a present value of $95, were received at the end of the current year. All promises are reported as restricted.
3.
At the end of the year, the fair value of LRF’s investments in 1(c) is $920. Investment income on the securities is $25, all received in cash. The investments on hand at the beginning of the year were investment of excess cash, sold during the year for $210.
4.
Expenses for the year were as follows: Educational programs Financial relief programs Administrative Fund-raising Total
$ 1,050 930 370 65 $2,415
These expenses were paid in cash, except for $200 still owed on purchased supplies, salaries, etc., and $60 in depreciation on buildings and equipment, which is included as part of administrative expense. All unpaid bills outstanding at the beginning of the year were paid during the year. 5.
$20 of the investment income in Item 3 above was used for tutoring expenditures, and $450 of the government grant in 1(b) above was used for financial relief programs. All these expenditures are already included in the expenses listed above.
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-55
Required Prepare the following financial statements for Lancaster Relief Foundation for the current year: a. Statement of activities b. 1. Statement of cash flows, using the direct method for the operating activities section. 2. Cash from operating activities section of the statement of cash flows, using the indirect method. ANS: a. LANCASTER RELIEF FOUNDATION Statement of Activities For the Current Year
Revenues, gains, and other support: Contributions Investment income Unrealized investment gains Realized investment gains Increase in present value of promises Net assets released from restrictions Total revenues, gains, and other support Expenses: Programs Educational programs Financial relief programs Administrative Fund-raising Total expenses Change in net assets Beginning balance Ending balance
©Cambridge Business Publishers, 2023 13-56
Net assets without donor restrictions
Net assets with donor restrictions
$ 1,500
$ 1,595 25 20
10 470 1,980
35 (470) 1,205
(1,050) (930) (370) (65) (2,415) (435) 680 $ 245
_____ _____ 1,205 755 $ 1,960
Advanced Accounting, 5th Edition
b.1. LANCASTER RELIEF FOUNDATION Statement of Cash Flows For the Current Year Cash from operating activities Cash contributions (1) $ 2,150 Investment income 25 Operating expenditures (2) (2,315) Cash used for operating activities
$(140)
Cash from investing activities Sales of securities Purchases of securities Cash from investing activities
(690)
210 (900)
Cash from financing activities Endowment Increase in cash Beginning cash balance Ending cash balance
900 70 395 $ 465
(1) $1,500 + $600 + $50 = $2,150 (2) $2,415 - $200 – $60 + $160 = $2,315
b.2. Cash from operating activities, indirect method Change in net assets ($1,205 - $435) Less endowment Less increase in contributions receivable ($95 +$35 - $50) Less unrealized gain on investments Less realized gain on investments Plus increase in accounts payable ($200 - $160) Plus depreciation expense Cash used for operating activities
Test Bank, Chapter 13
$ 770 (900) (80) (20) (10) 40 60 $(140)
©Cambridge Business Publishers, 2023 13-57
30.
Topic: Statement of activities LO 1, 2 Transition Services (TS), a private not-for-profit organization, was established on January 2, 2024 to provide training programs for those in career transition. The following events occur in 2024: 1.
3.
$1,000,000 was received in government funding, in the form of grants. Of this total, $500,000 was designated by the government for constructing a building, $400,000 was designated to be used to set up computer training programs, and the rest was unrestricted. TS received $50,000 in unrestricted cash contributions and $125,000 in documented pledges to be received in 2025, all restricted. 10% of pledges are estimated to be uncollectible. Expenses for the year were as follows: General Training Services Programs Fund-raising Salaries $ 50,000 $ 60,000 $15,000 Supplies 30,000 75,000 8,000 Utilities 30,000 45,000 5,000 Travel --15,000 Total $110,000 $170,000 $43,000
4.
All of the above expenses were paid in cash, except for $20,000 still owed to suppliers. Of the $170,000 in expenses for training programs, $120,000 was financed by the government grant described in Item 1 above. Expenses are displayed functionally in the statement of activities. Services were donated as follows (fair values of services provided are shown in parenthesis): Audit by local CPA ($6,000) High school students distributed fliers to the public ($1,500) Contractor drafted plans for the building ($22,000)
2.
Required Prepare a 2024 statement of activities for Transition Services.
©Cambridge Business Publishers, 2023 13-58
Advanced Accounting, 5th Edition
ANS: TRANSITION SERVICES Statement of Activities For the Year Ended December 31, 2024 Net assets without donor restrictions Revenues, gains, and other support: Grants $ 100,000 Contributions 50,000 Pledges -Donated services 28,000 Net assets released from restrictions 120,000 Total 298,000 Expenses General services 110,000 Training programs 170,000 Fund-raising 43,000 Total 323,000 Change in net assets (25,000) Beginning net assets 0 Ending net assets $(25,000)
Test Bank, Chapter 13
Net assets with donor restrictions $ 900,000 112,500 (120,000) 892,500
_______ _______ 892,500 0 $892,500
©Cambridge Business Publishers, 2023 13-59
31.
Topic: Complete financial statements LO 1, 2, 3 Accounting Professionals International (API) is a private not-for-profit organization that promotes the accounting profession. Here is its trial balance at January 1, 2024:
Cash Contributions receivable Property and equipment, net Investments Accounts payable Net assets without donor restrictions Net assets with donor restrictions Total
Dr (Cr) $ 32,000 35,000 100,000 80,000 (20,000) (157,000) (70,000) $ 0
API’s transactions and other activities for 2024 are as follows: 1. Cash contributions of $150,000 were received. They consist of: (a) $95,000 cash received from friends of API as general contributions, (b) $30,000 in contributions that are restricted to programs that promote accounting careers to high school students, and (c) $25,000 in endowments. 2. The contributions receivable outstanding on January 1, 2024 represent the present value of promises to contribute, discounted at 4%. On December 31, 2024, $4,000 was received related to these promises. These promises are restricted to specific projects. 3. Information on the $80,000 in investments on hand at January 1, 2024 is as follows: (a) $30,000 represents securities contributed by a donor in prior years. The securities are donor restricted. The fair value of these securities is $29,000 at the end of 2024. (b) $10,000 of securities represent the investment of endowment contributions of $10,000 in cash at the end of 2023. The fair value of these securities is $12,000 at the end of 2024. Income is unrestricted. (c) The remainder of $40,000 of securities are investments of excess cash and have a fair value of $40,500 at the end of 2024. (d) No securities were sold during 2024. 4. Investments of $25,000 in endowed cash were made toward the end of 2024. There are no unrealized gains and losses on these investments in 2024. 5. Investment income, received in cash, totaled $9,000. Of this amount, $3,000 is income that is donor- restricted to specific programs. 6. Expenses for the year were as follows: Programs $ 135,000 Management and general 16,500 Fund-raising 3,500 Total $ 155,000
7.
$40,000 of this total represents spending for donor-specified activities. Also included is $5,000 depreciation on API property. Accounts payable decreased by $1,500 in 2024. API reports expenses functionally on its statement of activities. $2,000 fair value of management and general services were donated, and properly recognized as contributions per ASC 958.
©Cambridge Business Publishers, 2023 13-60
Advanced Accounting, 5th Edition
Required a. Present API’s statement of activities for 2024, in good form. API does not display an intermediate performance measure. b. Present API’s statement of financial position at December 31, 2024, in good form. c. Present API’s statement of cash flows for 2024, in good form, using the direct approach for the operating section. d. Present the operating section of API’s statement of cash flows for 2024, using the indirect approach. ANS: a. ACCOUNTING PROFESSIONALS INTERNATIONAL Statement of Activities Year Ended December 31, 2024 Net assets without Net assets with donor restrictions donor restrictions Revenues and other support: Cash contributions $ 95,000 $55,000 Service contributions 2,000 -Investment income 6,000 3,000 Unrealized investment gains (losses) 2,500 (1,000) Promises of contributions -1,400 Net assets released from restrictions 40,000 (40,000) Total revenues and other support 145,500 18,400 Expenses: Programs (135,000) -Management and general (18,500) -Fund-raising (3,500) -Total expenses 157,000 -Change in net assets (11,500) 18,400 Beginning net assets 157,000 70,000 Ending net assets $145,500 $88,400 b. ACCOUNTING PROFESSIONALS INTERNATIONAL Statement of Financial Position December 31, 2024 Assets Liabilities Cash $ 18,500 Accounts payable Contributions receivable (1) 32,400 Net assets Property and equipment, net 95,000 Without donor restrictions Investments (2) 106,500 With donor restrictions Total $252,400 Total
$ 18,500 145,500 88,400 $252,400
(1) $35,000 + $1,400 - $4,000 = $32,400 (2) $80,000 - $1,000 + $2,000 + $500 + $25,000 = $106,500
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-61
c. ACCOUNTING PROFESSIONALS INTERNATIONAL Statement of Cash Flows Year Ended December 31, 2024 Cash from operating activities: Contributions (1) $129,000 Investment income 9,000 Expenses (2) (151,500) Cash used for operating activities Cash for investing activities: Investments Cash from financing activities: Endowments Change in cash Beginning cash balance Ending cash balance
$ (13,500) (25,000) 25,000 (13,500) 32,000 $ 18,500
(1) $125,000 + $4,000 = $129,000 (2) $155,000 + $1,500 - $5,000 = $151,500
d. Cash from operating activities: Indirect approach Change in net assets (1) Less endowment Plus decrease in contributions receivable (2) Less net unrealized gains on investments (3) Less decrease in accounts payable Plus depreciation expense Cash used for operating activities
$ 6,900 (25,000) 2,600 (1,500) (1,500) 5,000 $(13,500)
(1) $18,400 - $11,500 = $6,900 (2) $35,000 - $32,400 = $2,600 (3) $2,000 + $500 - $1,000 = $1,500
32.
Topic: Complete financial statements LO 1, 2, 3 Suppose New York City’s Museum of Modern Art reports the following trial balance on June 30, 2023 (in thousands):
Cash Accounts receivable Contributions receivable Investments Plant and equipment, net Accounts payable Loans payable Net assets without donor restrictions Net assets with donor restrictions
©Cambridge Business Publishers, 2023 13-62
Debit $ 54,000 1,000 215,000 850,000 510,000
Credit
$
______ $ 1,630,000
50,000 335,000 705,000 540,000 $ 1,630,000
Advanced Accounting, 5th Edition
Activities for fiscal 2024 are listed below. NOTE: On the statement of activities, there are two sections: operating and nonoperating. Operating expenses are divided between three categories on the statement of activities: programs, administrative, and fund-raising. All numbers below are in thousands. 1. 2.
3.
4.
5. 6.
7. 8. 9.
Cash received from contributions was as follows: $30,000 unrestricted, $75,000 donorrestricted to specific program-related events and exhibitions, and $1,500 in permanent endowments. The museum accrues membership fees due but not yet paid as of year-end. The accounts receivable balance at the beginning of the year represents fees accrued in fiscal 2023. In fiscal 2024, cash received from admission and membership fees totaled $40,000, and membership fees of $1,300 are due as of year-end. The contributions receivable balance at the beginning of the year is the present value of documented promises of contributions. Documented promises with a present value of $5,000 were received during the year. The increase in the present value of all promises during fiscal 2024 was $8,000. All promises are purpose restricted. Cash received related to promises was $35,000. Investments at the beginning of fiscal 2024 consist of $150,000 investments of excess cash, $200,000 donated securities that are a permanent endowment, and $500,000 of permanent endowment cash that was invested in securities. There are no other donor restrictions related to the securities. The following activities relate to these investments: a. The endowment cash received in Item 1 above was invested in securities. b. $20,000 book value of investments of excess cash were sold during the year for $23,000. c. The donated securities increased in value to $215,000. d. The securities acquired with permanently endowed cash increased in value by $20,000. e. Investment income, all received in cash, totaled $19,000. $100,000 in cash received in a prior year from donor-restricted contributions was spent during fiscal 2024 for program-related operating activities, all reported as expenses. Out-of-pocket operating expenses for the year, not including the expenses in Item 5 above, were $130,000. The year-end accounts payable balance, all related to operating expenses, was $47,000. Of the total operating expenses of $130,000, $25,000 were for administrative activities, $15,000 were for fund-raising, and $90,000 were for programs. Donated legal and financial services had a fair value of $4,000 and were properly recognized as contributions per ASC 958. These services are classified as administrative expenses. Depreciation for the year on plant and equipment was $10,000, of which $8,000 related to program activities and $2,000 related to administrative activities. Interest expense on the loans was $15,000, paid in cash. Principal payments of $8,000 were made.
Required Prepare, in good form, the following financial statements for the Museum of Modern Art: a. b. c.
Statement of activities for fiscal 2024. The Museum categorizes items as operating and nonoperating. Statement of financial position, June 30, 2024. Statement of cash flows for fiscal 2024, using the direct approach for the operating section.
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-63
ANS: a. MUSEUM OF MODERN ART Statement of Activities For Year Ended June 30, 2024 Net assets without donor (in thousands) restrictions Operating revenues and other support: Contributions $ 30,000 Promised contributions (1) Admission and membership fees (2) 40,300 Contributions of services 4,000 Net assets released from restrictions (100,000) Total revenues and other support 174,300 Operating expenses: Programs (3) 163,000 Administrative (4) 31,000 Fund-raising 15,000 Total operating expenses (209,000) Excess of operating expenses over operating revenues and other support (34,700) Nonoperating items: Gain on sale of investments 3,000 Unrealized gains on investments 20,000 Investment income 19,000 Interest expense (15,000) Total nonoperating items 27,000 Change in net assets (7,700) Beginning net assets 705,000 Ending net assets $ 697,300 (1) (2) (3) (4)
Net Assets with donor restrictions $ 76,500 13,000
(100,000) (10,500)
_______
15,000 _______ 4,500 540,000 $ 544,500
$8,000 + $5,000 = $13,000 $40,000 - $1,000 + $1,300 = $40,300 $65,000 + $90,000 + $8,000 = $163,000 $25,000 + $4,000 + $2,000 = $31,000
©Cambridge Business Publishers, 2023 13-64
Advanced Accounting, 5th Edition
b. MUSEUM OF MODERN ART Statement of Financial Position June 30, 2024 (in thousands) Assets Cash Accounts receivable Contributions receivable (1) Investments (2) Plant and equipment, net (3) Total assets
$
55,000 1,300 193,000 866,500 500,000 $1,615,800
Liabilities Accounts payable Loans payable (4) Net assets Net assets without donor restrictions Net assets with donor restrictions Total liabilities and net assets
$
47,000 327,000
697,300 544,500 $1,615,800
(1) $215,000 + $5,000 + $8,000 - $35,000 = $193,000 (2) $850,000 + $1,500 - $20,000 + $15,000 + $20,000 = $866,500 (3) $510,000 - $10,000 = $500,000 (4) $335,000 - $8,000 = $327,000
c. MUSEUM OF MODERN ART Statement of Cash Flows For Year Ended June 30, 2024 (in thousands) Cash from operating activities: Contributions (1) Admission and membership fees Interest payments Investment income Operating expenditures (2) Net cash used for operating activities Cash from investing activities: Investments Sale of investments Net cash provided by investing activities Cash for financing activities: Endowment contributions Loan payment Net cash used for financing activities Increase in cash Beginning cash balance Ending cash balance
$ 140,000 40,000 (15,000) 19,000 (198,000) (14,000) (1,500) 23,000 21,500 1,500 (8,000) (6,500) 1,000 54,000 $ 55,000
(1) Contributions = $30,000 + $75,000 + $35,000 = $140,000 (2) Operating expenditures = $65,000 + $130,000 + ($50,000 - $47,000) = $198,000
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-65
33.
Topic: Statement of activities; private hospital LO 1, 2, 3, 4 The following events pertain to Valley Hospital, a privately funded medical facility, for the current year. Valley’s accounting year ends December 31. 1. 2. 3.
The hospital billed patients for $12,000,000. Cafeteria sales were $4,800,000. Supplies with a market value of $200,000 were donated. Equipment with a market value of $500,000 and a book value to the donor of $450,000 was donated. There are no donor restrictions on either donation. Operating expenses were as follows: Patient services Research Administrative services General Total
4.
5.
6. 7.
$ 10,000,000 1,500,000 3,800,000 2,500,000 $17,800,000
A gift of $400,000 was received, to be used in a specific research program. $300,000 was expended for the research (included in 3. above), and the remainder was invested in short-term equity securities and earned income of $3,000. The donor specified that investment income is restricted for the designated research purposes, but unrealized gains and losses are unrestricted. The securities have a market value of $295,000 at year-end. An endowment of $500,000 is received. The principal is to be maintained, and investment income, gains and losses are unrestricted. The $500,000 is invested, and income of $14,000 is received. There are no unrealized gains or losses on the investments. $600,000 in previous years’ donations that were donor restricted to specific research programs was spent this year. This amount is included in 3. above. Included in general expenses are increases in the hospital’s pension liability, due to changes in assumptions, totaling $800,000.
Required Prepare Valley Hospital’s statement of activities for the year. Assume the beginning net asset balances for the hospital are: $3,000,000 for net assets without donor restrictions and $2,000,000 for net assets with donor restrictions. The hospital displays an intermediate performance measure, labeled “performance earnings,” following ASC Topic 954 requirements.
©Cambridge Business Publishers, 2023 13-66
Advanced Accounting, 5th Edition
ANS: VALLEY HOSPITAL Statement of Activities For the Year
(in thousands) Revenues, gains, and other support: Patient revenues Cafeteria revenues In-kind donations Contribution revenue Endowment Investment income Unrealized loss on investments Net assets released from program restrictions Total revenues, gains, and other support Expenses: Patient services Research Administrative General Total expenses Performance earnings Donation of equipment Change in pension liability assumptions Change in net assets Beginning balance Ending balance
Test Bank, Chapter 13
Net assets without donor restrictions
Net assets with donor restrictions
$12,000 4,800 200 --14 (5) 900 17,909
---400 500 3 -(900) 3
(10,000) (1,500) (3,800) (1,700) (17,000) 909 500 (800) 609 3,000 $ 3,609
---____-____----3 2,000 $ 2,003
©Cambridge Business Publishers, 2023 13-67
34.
Statement of activities, health care facility LO 4 Patient Health is a private NFP healthcare organization. Information on its performance for the current year is as follows (in thousands): Salaries and benefits for current employees Patient service revenues, gross Impairment losses on noncurrent assets Contributions of noncurrent assets Interest expense Unrestricted cash contributions Increase in pension and OPEB liability for prior service adjustments Contractual adjustments to patient service revenues Losses on trading debt securities Depreciation and amortization Medical insurance premium revenue Supplies used Investment net gains, equity securities
$38,000 39,000 100 250 500 7,000 1,300 6,000 150 1,000 4,000 1,600 80
Required Prepare Patient Health’s statement of activities, in good form. Patient Health uses an intermediate operating performance measure, and also complies with ASC Topic 954 requirements by displaying a performance indicator labeled “income.” ANS: Patient Health Statement of Activities
(in thousands) Operating revenues Patient service revenues, net ($39,000 - $6,000) Medical insurance premium revenue Unrestricted cash contributions Total operating revenues Operating expenses Salaries and benefits Supplies Depreciation and amortization Total operating expenses Net operating income Nonoperating expenses and losses Interest expense Investment losses ($150 - $80) Impairment losses Total nonoperating loss Income Prior service adjustment to pension and OPEB liability Contributions of noncurrent assets Change in net assets without donor restrictions ©Cambridge Business Publishers, 2023 13-68
$ 33,000 4,000 7,000 44,000 38,000 1,600 1,000 40,600 3,400 (500) (70) (100) (670) 2,730 (1,300) 250 $ 1,680
Advanced Accounting, 5th Edition
35.
Topic: Statement of activities, statement of financial position; private university LO 1, 2, 3, 4 Following is the trial balance for Overlin University, a privately funded university, as of the beginning of the year (in thousands):
Cash Receivables Restricted cash Investments Buildings and equipment, net Accrued liabilities Long-term debt Net assets without donor restrictions Net assets with donor restrictions Total
Dr $ 1,400 250 500 4,000 15,500
______ $ 21,650
Cr
$ 1,800 10,000 4,000 5,850 $ 21,650
Events for the year are as follows (in thousands): 1. 2. 3. 4. 5. 6. 7.
Tuition and fees are $10,000, of which $1,800 is waived for graduate teaching assistantships and $1,500 is covered by scholarships. $6,500 is collected in cash. All tuition and fees relate to the current year. Operating expenses for salaries, utilities, faculty development, etc. are $12,000. Not included are cost of assistantships in 1. Accrued liabilities increased $250. Depreciation on the buildings and equipment is $800, included in the $12,000 in operating expenses. An unrestricted state appropriation of $2,500 is received in cash. Cash donations and gifts are as follows: Restricted to equipment replacement $ 800 Restricted to faculty development 600 $650 of donor-restricted cash is spent to replace equipment. $450 of donor-restricted cash is spent for faculty development (not included in Item 2 above). $300 is spent to service the long-term debt ($250 for interest, and $50 for principal; the interest is not included in Item 2 above). Investment income, received in cash, is $1,800, of which $100 is donor-restricted to faculty development. Investments have a fair value of $4,275 at year-end. Unrealized gains and losses are unrestricted.
Required a. Present Overlin University’s statement of activities for the year. b. Present Overlin University’s statement of financial position as of the end of the year.
Test Bank, Chapter 13
©Cambridge Business Publishers, 2023 13-69
ANS: a. OVERLIN UNIVERSITY Statement of Activities For the Year
(in thousands) Tuition, fees Appropriations Contributions (1) Investment income Unrealized investment gains Net assets released from restrictions (2) Total revenues and support Operating expenses (3) Change in net assets Beginning balance Ending balance (1) (2) (3)
Net assets without donor restrictions $ 8,500 2,500 -1,700 275 1,100 14,075 (14,500) (425) 4,000 $ 3,575
Net assets with donor restrictions
$ 1,400 100 -(1,100) 400 -400 5,850 $ 6,250
$800 + $600 = $1,400 $650 + $450 = $1,100 $1,800 + $12,000 + $450 + $250 = $14,500
b. OVERLIN UNIVERSITY Statement of Financial Position As of End of Year (in thousands) Cash (1) Receivables (2) Restricted cash (3) Investments Buildings and equipment, net (4) Total assets Accrued liabilities (5) Long-term debt (6) Net assets without donor restrictions Net assets with donor restrictions Total liabilities and net assets (1) (2) (3) (4) (5) (6)
$ 1,100 450 650 4,275 15,350 $21,825 $ 2,050 9,950 3,575 6,250 $21,825
$1,400 + $6,500 - $10,950 + $2,500 + $600 - $450 - $300 + $1,800 = $1,100 $250 + ($6,700 - $6,500) = $450 $500 + $800 - $650 = $650 $15,500 - $800 + $650 = $15,350 $1,800 + $250 = $2,050 $10,000 - $50 = $9,950
©Cambridge Business Publishers, 2023 13-70
Advanced Accounting, 5th Edition
TEST BANK CHAPTER 14 Partnership Accounting and Reporting MULTIPLE CHOICE 1.
2.
3.
Topic: Partnership characteristics LO 1 Legal guidelines for partnership organization and operation are found in a. b. c. d.
The Uniform Partnership Act. The Partnership and Agency Code. The Internal Revenue Code. The Articles of Partnership Law.
ANS:
a
Topic: Partnership characteristics LO 1 The two major types of partnerships are a. b. c. d.
Limited liability company or limited liability partnership. General or master limited partnership. General or limited partnership. Taxable or nontaxable partnership.
ANS:
c
Topic: Partnership characteristics LO 1 Which one of the following is not a characteristic of a general partnership? a.
4.
b. c. d.
A partner has the right to participate in management but is not a co-owner of partnership property. A partnership is an entity distinct from the individual partners. A partner may legally enter a contract that also binds the other partners. Partnership income is separately taxed.
ANS:
d
Topic: Relations of partners to others LO 1 Joint and several liability in a partnership means that: a. b. c. d.
Each partner has personal liability for partnership obligations. Each partner’s personal liability for partnership obligations is limited to their initial investment in the partnership. Each partner’s personal liability for partnership obligations is limited to the balance in their capital account. Partners are responsible for their own actions but not the actions of the other partners.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-1
ANS: 5.
6.
7.
8.
a
Topic: Relations of partners to others LO 1 Partnerships often organize as LLCs or LLPs to a. b. c. d.
Reduce taxes. Reduce liability for partnership debts. Reduce liability for individual debts. Reduce transferability of partnership interests.
ANS:
b
Topic: Partnership characteristics LO 1 A general partnership is considered a separate accounting entity for: a. b. c. d.
tax and reporting purposes. tax purposes but not reporting purposes. reporting purposes but not tax purposes. neither tax or reporting purposes.
ANS:
c
Topic: Partnership characteristics LO 1 Professional service organizations, such as CPA and law firms, organize as: a. b. c. d.
Limited liability partnerships (LLP) Subchapter S corporations Publicly traded partnerships Limited liability corporations (LLC)
ANS:
a
Topic: Limited partnerships LO 1 In a limited partnership, the limited partners: a. b. c. d.
Cannot share in partnership profits. Only receive a fixed periodic payment in return for their investment. Have no right to participate in management. Have no liability for partnership obligations.
ANS:
c
©Cambridge Business Publishers, 2023 14-2
Advanced Accounting, 5th Edition
9.
10.
11.
Topic: Limited partnerships LO 1 Partnerships that include at least one general partner and one or more limited partners include all of the following except: a. b. c. d.
LLBs. LLPs. MLPs. LLCs.
ANS:
a
Topic: Limited liability company LO 1 Which characteristic does not apply to a limited liability company? a. b. c. d.
The company is governed by articles of organization. Owners cannot include corporations. Double taxation of income and dividends is avoided. Professional managers may make day to day decisions.
ANS:
b
Topic: Relations among partners LO 1 Absent a separate agreement, the Revised Uniform Partnership Act provides for all of the following except: a. b. c. d. ANS:
12.
No person can become a member of the partnership without the consent of all partners. Disagreements arising as to ordinary matters connected with partnership business may be decided by a majority of the partners. Partners have the right to receive a return on capital invested in the partnership. A partner who makes a payment beyond the amount of capital which he/she agreed to contribute shall be paid interest from the date of payment. c
Topic: Relations among partners LO 1 Unless the partnership agreement has a different specific arrangement, partnership income is allocated between partners: a. b. c. d.
In proportion to their initial capital investment Equally In proportion to their current capital balance On the basis of their involvement with partnership management
ANS:
b
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-3
13.
14.
Topic: Partner liability LO 1 If a CPA firm is organized as an LLP and an individual partner is involved in a negligent audit, another partner in the same CPA firm is personally liable: a. b. c. d.
Always. If the partner operates out of the same office. If the partner was involved in the audit in a supervisory role. Never.
ANS:
c
Topic: Limited partnerships LO 1 Which statement is false concerning attributes of limited partnerships? a. b.
15.
16.
c. d.
There is at least one general partner. A limited partner’s liability for partnership debts is limited to their investment in the partnership. Limited partners have no right to a specified share of partnership income or loss. Only the general partner(s) have the right to participate in managing the partnership.
ANS:
c
Topic: Limited partnerships LO 1 In a limited partnership, limited liability means a limited partner’s liability for partnership debts is a. b. c. d.
zero; limited partners are not liable for any partnership debts. zero for debts originating from the actions of general partners. limited for partnership business debts but not for federal claims. limited to their investment in the partnership.
ANS:
d
Topic: Limited partnerships LO 1 The distinguishing feature of a master limited partnership (MLP) is that: a. b. c. d.
Its income must come mostly from tech-related services. Partnership income is not taxed separately. Partnership income is defined as the amount of cash distributed to partners. Partnership shares trade on markets.
ANS:
d
©Cambridge Business Publishers, 2023 14-4
Advanced Accounting, 5th Edition
17.
Topic: Limited partnerships LO 1 In an MLP, a.
c. d.
An investor’s share of partnership income in excess of cash distributions reduces their basis in the investment. Cash distributions to investors in excess of their share of partnership income reduce their basis in the investment. Partners are taxed on cash distributions rather than partnership income. Investors are only taxed on capital gains on the sale of their shares.
ANS:
b
b.
18.
19.
20.
Topic: Partnership reporting issues LO 1 Partnership reporting follows what reporting standards? a. b. c. d.
FASB requirements for private companies Standards of the GASB FASB requirements for public companies or standards for private companies Standards of the state in which they are incorporated.
ANS:
c
Topic: Partnership reporting issues LO 1 A salary paid to a partner is reported as: a. b. c. d.
A reduction in his or her capital account A charge to dividends, a temporary account closed to partnership retained income An expense, reducing partnership income A deferred outflow, amortized to expense over time
ANS:
a
Topic: Measuring partnership income LO 1 Which of the following is false regarding the measurement of partnership income? a. b. c. d.
Partnerships must use the cash basis of accounting rather than the accrual basis. Salaries to partners are treated as distributions of partnership income. Interest allocated to partners is not deducted as an expense in measuring partnership income. Partnerships do not report income tax expense.
ANS:
a
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-5
21.
22.
23.
Topic: Consolidation of partnerships LO 1 A corporation has a financial relationship with a limited partnership. It is most likely to include the accounts of the partnership in its financial statements (i.e., consolidate the partnership) if the corporation: a. b. c. d.
Owns the majority of partnership shares. Is the general partner. Has the largest capital balance. Is a limited partner.
ANS:
b
Topic: Consolidation of partnerships LO 1 A limited partner in a partnership may consolidate the partnership in its financial statements a. b. c. d.
Never. If the partnership does not qualify as a variable interest entity. If the limited partner has substantial kick-out rights. If the limited partner has contributed a substantial amount of the partnership’s resources.
ANS:
c
Topic: Characteristics of partnerships LO 1 A major characteristic of partnerships is that they are considered conduits. This means that a. b. c. d.
unless organized as limited partnerships, all partners are liable for partnership debts. an individual partner may incur partnership liabilities. partnership drawings in excess of partnership income are not taxed. a partner’s share of partnership income is reported on the partner’s personal tax return.
ANS:
d
Use the following information to answer Questions 24 – 27. Patel and Rao decide to form a partnership. Patel contributes $250,000 in cash. Rao contributes buildings and equipment with a fair market value of $500,000, subject to a mortgage of $100,000, which the partnership assumes. 24.
Topic: Partnership formation LO 2 If each partner's capital account is initially set equal to net assets invested at fair market value, the entry to record the partnership formation includes the following: a. b. c. d.
A credit to Patel’s capital account for $150,000. A credit to Patel’s capital account for $325,000. A credit to Rao’s capital account for $400,000. A credit to Rao’s capital account for $500,000.
©Cambridge Business Publishers, 2023 14-6
Advanced Accounting, 5th Edition
ANS:
25.
26.
27.
c The entry to record the formation of the partnership is: Cash Buildings & equipment Mortgage payable Capital—Patel Capital—Rao
250,000 500,000 100,000 250,000 400,000
Topic: Partnership formation, bonus method LO 2 Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows: 50% to Patel, and 50% to Rao. If the bonus approach to partnership formation is used, Rao’s initial capital balance will be: a. b. c. d.
$400,000 $250,000 $325,000 $375,000
ANS:
c The total partnership capital is $650,000 ($250,000 in cash plus $500,000 in property less $100,000 mortgage); Rao receives 50% of $650,000, or $325,000.
Topic: Partnership formation, goodwill method LO 2 Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows: 50% to Patel, and 50% to Rao. If the goodwill approach to partnership formation is used, the initial entry to record the formation of the partnership will recognize goodwill of: a. b. c. d.
$400,000 $250,000 $100,000 $150,000
ANS:
d If Patel’s fair value contribution of $250,000 is equal to a 50% interest, and Rao’s $400,000 contribution is a 50% interest, then Patel contributes $400,000 - $250,000 = $150,000 of goodwill.
Topic: Partnership formation, goodwill method LO 2 Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows: 50% to Patel, and 50% to Rao. If the goodwill approach to partnership formation is used, Rao’s initial capital balance is: a. b. c. d.
$410,000 $350,000 $400,000 $450,000
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-7
ANS:
c The entry to record the formation of the partnership is: Cash Buildings & equipment Goodwill Mortgage payable Capital—Patel Capital—Rao
250,000 500,000 150,000 100,000 400,000 400,000
Use the following information to answer Questions 28 - 30. Quarry and Ravine form a partnership. Quarry contributes $500,000 in cash. Ravine contributes cash of $350,000 and supplies with a fair value of $150,000. 28.
29.
Topic: Partnership formation, bonus method LO 2 Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows: 75% to Quarry, and 25% to Ravine. If the bonus approach to partnership formation is used, Ravine’s initial capital balance will be: a. b. c. d.
$500,000 $250,000 $750,000 $350,000
ANS:
b The total partnership capital is $1,000,000. Ravine receives 25% of $1,000,000, or $250,000.
Topic: Partnership formation, goodwill method LO 2 Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows: 75% to Quarry, and 25% to Ravine. If the goodwill approach to partnership formation is used, the initial entry to record the formation of the partnership will recognize goodwill of: a. b. c. d.
$1,500,000 $ 500,000 $ 250,000 $1,000,000
ANS:
d If Quarry’s fair value contribution of $500,000 is equal to a 75% interest, and Ravine’s $500,000 contribution is only a 25% interest, then Quarry must be contributing $500,000/0.25 = $2,000,000 – $1,000,000 = $1,000,000 of goodwill.
©Cambridge Business Publishers, 2023 14-8
Advanced Accounting, 5th Edition
30.
31.
Topic: Partnership formation, goodwill method LO 2 Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows: 75% to Quarry, and 25% to Ravine. If the goodwill approach to partnership formation is used, Ravine’s initial capital balance is: a. b. c. d.
$1,500,000 $ 500,000 $ 250,000 $1,000,000
ANS:
b The entry to record the formation of the partnership is: Cash Supplies Goodwill Capital—Quarry Capital—Ravine
1,500,000 500,000
Topic: Formation of a partnership LO 2 A partnership is formed with four partners. Each partner invests net assets with a different fair value, but they are each given a 25% capital percentage. Which of the following statements is true? a. b. c. d. ANS:
32.
850,000 150,000 1,000,000
Using the bonus method, the partners will have different initial capital balances. Total capital balances will be the same whether the bonus or goodwill method is used. Because the investments are unequal, it is not possible to set each partner’s capital balance equal to the amount invested. The capital balances will be equal regardless of whether the bonus or goodwill method is used. d
Topic: Partnership income allocation LO 3 A partnership’s income-sharing ratio applies to: a. b. c. d.
Partnership income after salaries and interest are deducted Partnership income before salaries are deducted but after interest is deducted Partnership income after salaries are deducted but before interest is deducted Partnership income before both salaries and interest are deducted
ANS:
a
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-9
33.
34.
Topic: Partnership income LO 3 The interest component of partnership income allocation is usually based on a percentage of: a. b. c. d.
Salary Weighted average invested capital Partnership income Partnership income before deducting salaries and interest
ANS:
b
Topic: Partnership income allocation LO 3 Xun, Yue and Zhuo have interests in XYZ Partnership. Partnership income for the year is $600,000. The partnership agreement specifies that Xun is to receive an annual salary of $200,000, Yue is to receive an annual salary of $250,000, and Zhuo is to receive an annual salary of $100,000. Any remaining income or loss is to be divided between the three partners in a 2:1:1 ratio. Salaries are to be fully implemented. Partnership income allocated to Zhuo is: a. b. c. d.
$112,500 $127,500 $120,000 $126,000
ANS:
a Salary $50,000 remaining Total
35.
Xun $200,000 25,000 $225,000
Yue $250,000 12,500 $262,500
Zhuo $100,000 12,500 $112,500
Topic: Partnership income allocation LO 3 Xun, Yue and Zhuo have interests in XYZ Partnership. Partnership income for the year is $450,000. The partnership agreement specifies that Xun is to receive an annual salary of $200,000, Yue is to receive an annual salary of $250,000, and Zhuo is to receive an annual salary of $100,000. Any remaining income or loss is to be divided between the three partners in a 2:1:1 ratio. Salaries are to be fully implemented. Partnership income allocated to Yue is: a. b. c. d.
$250,000 $225,000 $200,000 $185,000
ANS:
b Salary $(100,000) remaining Total
©Cambridge Business Publishers, 2023 14-10
Xun $200,000 (50,000) $150,000
Yue $250,000 (25,000) $225,000
Zhuo $100,000 (25,000) $ 75,000
Advanced Accounting, 5th Edition
36.
Topic: Partnership income allocation LO 3 Xun, Yue and Zhuo have interests in XYZ Partnership. Partnership income for the year is $330,000. The partnership agreement specifies that Xun is to receive an annual salary of $200,000, Yue is to receive an annual salary of $250,000, and Zhuo is to receive an annual salary of $100,000. Any remaining income or loss is to be divided between the three partners in a 2:1:1 ratio. Salaries are to be proportionately implemented. Partnership income allocated to Xun is: a. b. c. d.
$165,000 $150,000 $120,000 $200,000
ANS:
c Total salaries are $550,000. Partnership income is $330,000. Therefore $330,000/$550,000 = 60% of salaries are paid. Xun Yue Zhuo Salary $120,000 $150,000 $60,000
Use the following information to answer Questions 37 – 39 below: The ADF Partnership consists of three partners, Ansel, Davis, and Findley. The partnership agreement provides for annual salaries of $30,000 to Ansel, $40,000 to Davis, and $75,000 to Findley. Residual profits are shared in a 2:1:2 ratio. Salaries are to be fully implemented. 37.
38.
Topic: Partnership income allocation LO 3 Partnership income for the year is $180,000. Ansel’s share of income is a. b. c. d.
$30,000. $44,000. $72,000. $37,000.
ANS:
b $30,000 + (($180,000 - $145,000) x 2/5)= $44,000
Topic: Partnership income allocation LO 3 Partnership income for the year is $100,000. Findley’s share of income is a. b. c. d.
$84,000. $66,000. $75,000. $57,000.
ANS:
d $75,000 – (($145,000 - $100,000) x 2/5) = $57,000
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-11
39.
Topic: Partnership income allocation LO 3 Now assume that partnership income for the year is $58,000, and salaries are implemented proportionately. Davis’s share of income is a. b. c. d.
$16,000. $24,000. $22,000. $40,000.
ANS:
a ($58,000/$145,000) x $40,000 = $16,000
Use the following information to answer Questions 40 and 41 below: Jing, Kang and Liang have interests in the JKL Partnership. Partnership income for the year is $300,000. The partnership agreement specifies that partnership income is to be allocated as follows: salaries of $80,000 to Jing, $50,000 to Kang, and $50,000 to Liang; a bonus of 20% of partnership income, after deducting salaries and bonus, to Kang, and the remainder allocated between the three partners in a 3:1:1 ratio. 40.
41.
Topic: Partnership income allocation LO 3 Kang's bonus for the year is: a. b. c. d.
$34,000 $20,000 $24,000 $60,000
ANS:
b B = Bonus to Kang B = ($300,000 – $180,000 – B) x 20% B = $24,000 – 0.2B B = $20,000
Topic: Partnership income allocation LO 3 The total allocation to Liang is: a. b. c. d.
$70,000 $50,000 $74,000 $80,000
ANS:
a
©Cambridge Business Publishers, 2023 14-12
Advanced Accounting, 5th Edition
Notes for Questions 40 and 41:
Salary Bonus $100,000 remaining Total
Jing $80,000 -60,000 $140,000
Kang $50,000 20,000 20,000 $90,000
Liang $50,000 -20,000 $70,000
Use the following information to answer Questions 42 and 43 below: Anh, Byun and Chea have interests in the ABC Partnership. Partnership income for the year is $200,000. The partnership agreement specifies that partnership income is to be allocated as follows: salaries of $20,000 to Anh, $60,000 to Byun, and $20,000 to Chea; a bonus of 25% of partnership income, after deducting salaries and bonus, to Chea, and the remainder allocated between the three partners in a 5:2:1 ratio. 42.
43.
Topic: Partnership income allocation LO 3 Chea’s bonus is: a. b. c. d.
$50,000 $20,000 $25,000 $40,000
ANS:
b B = Bonus to Chea B = ($200,000 – $100,000 – B) x 25% B = $25,000 – 0.25B B = $20,000
Topic: Partnership income allocation LO 3 The total income allocation to Anh is: a. b. c. d.
$45,000 $20,000 $70,000 $75,000
ANS:
c
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-13
Notes for Questions 42 and 43:
Salary Bonus $80,000 remaining Total 44.
45.
Anh $20,000 -50,000 $70,000
Byun $60,000 -20,000 $80,000
Chea $20,000 20,000 10,000 $50,000
Topic: Partnership income allocation LO 3 A partnership agreement specifies that each partner is to receive 20 percent interest on their weighted average capital balance for the year. Suppose a partner’s capital account starts the year with a balance of $100,000. On April 1, $20,000 is withdrawn. On July 1, $5,000 is withdrawn. On September 1, $45,000 is invested. How much partnership income for the year will be allocated to the partner for interest on capital? a. b. c. d.
$97,500 $21,350 $18,250 $19,500
ANS:
d $100,000(3/12) + $80,000(3/12) + $75,000(2/12) + $120,000(4/12) = $97,500 20% x $97,500 = $19,500
Topic: Partnership income allocation LO 3 A partnership agreement specifies that each partner is to receive 25 percent interest on their weighted average capital balance for the year. Suppose a partner’s capital account starts the year with a balance of $100,000. On April 1, $10,000 is withdrawn. On August 1, $50,000 is invested. On November 1, $17,000 is withdrawn. How much partnership income for the year will be allocated to the partner for interest on capital? a. b. c. d.
$30,975 $26,475 $27,625 $28,675
ANS:
c $100,000(3/12) + $90,000(4/12) + $140,000(3/12) + $123,000(2/12) = $110,500 25% x $110,500 = $27,625
Use the following information to answer Questions 46 and 47 below: Partners Mann and Nie receive a yearly salary of $100,000 and $80,000, respectively. Partnership income for the year, before any distributions to partners, is $250,000. Assume full implementation.
©Cambridge Business Publishers, 2023 14-14
Advanced Accounting, 5th Edition
46.
47.
Topic: Partnership income allocation LO 3 Mann and Nie each receive a bonus of 20% of partnership income after salaries and both bonuses. What is Mann’s bonus? a. b. c. d.
$10,000 $11,667 $12,333 $14,000
ANS:
a M = 20% x ($250,000 - $180,000 – M – N) M=N M = $14,000 – 0.4M M = $10,000
Topic: Partnership income allocation LO 3 Mann receives a bonus of 40% of partnership income after salaries and both bonuses, and Nie receives a bonus of 20% of partnership income after salaries and both bonuses. What is Nie’s bonus? a. b. c. d.
$10,350 $11,667 $ 8,750 $ 9,250
ANS:
c N = 20% x ($250,000 - $180,000 – M – N) M = 2N N = $14,000 – 0.6N N = $8,750
Use the following information to answer Questions 48 – 51. Liam, Michael and Noah own interests in the LMN Partnership. Their current capital account balances are as follows: Liam $450,000 Michael 350,000 Noah 200,000 Partnership income is shared in a 1:5:4 ratio. Olivia buys a 20% interest in the partnership by acquiring 20% of each existing partner's interest, paying the three partners a total of $300,000. Partnership identifiable net assets are currently reported at amounts approximating fair value.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-15
48.
49.
50.
51.
Topic: Admission of new partner by purchasing existing interest LO 4 Using the transfer of capital interests approach, Olivia’s initial capital balance after entering the partnership is: a. b. c. d.
$300,000 $175,000 $200,000 $140,000
ANS:
c 20% x ($450,000 + $350,000 + $200,000) = $200,000
Topic: Admission of new partner by purchasing existing interest LO 4 Using the transfer of capital interests approach, Liam’s capital balance immediately following admission of Olivia is: a. b. c. d.
$450,000 $360,000 $405,000 $440,000
ANS:
b 80% x $450,000 = $360,000
Topic: Admission of new partner by purchasing existing interest LO 4 Using the recognition of implied goodwill approach, implied goodwill is: a. b. c. d.
$500,000 $800,000 $300,000 $100,000
ANS:
a Implied goodwill is $300,000/0.2 = $1,500,000 – $1,000,000 = $500,000
Topic: Admission of new partner by purchasing existing interest LO 4 Using the recognition of implied goodwill approach, Michael’s capital balance after the addition of Olivia to the partnership is: a. b. c. d.
$280,000 $350,000 $420,000 $480,000
©Cambridge Business Publishers, 2023 14-16
Advanced Accounting, 5th Edition
ANS:
52.
d Michael receives 50% of $500,000 = $250,000 in goodwill. Michael then gives up 20% of his new capital balance of $350,000 + $250,000 = $600,000, resulting in a balance of 80% x $600,000 = $480,000.
Topic: Admission of new partner by purchasing existing interest LO 4 Which of the following is false regarding the admission of a new partner by purchase of an existing partnership interest? a. b. c. d. ANS:
Using the transfer of capital interests approach, total partnership capital stays the same. Using the transfer of capital interests approach, partnership capital of existing partners changes by the same percentage. Using the implied goodwill approach, the only revaluation of partnership net assets is the addition of goodwill. Using the implied goodwill approach, the recognized goodwill is shared among only the existing partners. c
Use the following information to answer Questions 53 – 60. The capital balances of the DEF Partnership are as follows: Danielson Eklund Forsberg Total
$180,000 95,000 150,000 $425,000
The partners' income sharing ratio is: Danielson, 25%; Eklund, 45%; Forsberg, 30%. Gustafson joins the partnership by contributing $140,000 to the partnership for a 20% interest in partnership capital. Assume the partnership’s identifiable net assets are carried at amounts approximating fair value. 53.
Topic: Admission of new partner by investment of new capital: bonus method LO 4 If the bonus method is used, Gustafson’s capital balance is: a. b. c. d.
$110,000 $140,000 $113,000 $ 85,000
ANS:
c 20% x ($425,000 + $140,000) = $113,000
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-17
54.
55.
56.
Topic: Admission of new partner by investment of new capital: bonus method LO 4 If the bonus method is used, Danielson’s capital balance after the admission of Gustafson is: a. b. c. d.
$185,400 $186,750 $186,000 $179,250
ANS:
b The $27,000 difference ($140,000 – $113,000) between the amount credited to Gustafson and his contribution to the partnership is an increase in the existing partners' capital accounts; Danielson’s new balance is $180,000 + (25% x $27,000) = $186,750.
Topic: Admission of new partner by investment of new capital: goodwill method LO 4 If the goodwill method is used to record the admission of Gustafson, goodwill will be recorded on the books of the partnership in the amount of: a. b. c. d.
$135,000 $ 28,000 $275,000 $ 70,000
ANS:
a Total value implied by Gustafson’s investment = $140,000/0.2 = $700,000 Goodwill = $700,000 – ($425,000 + $140,000) = $135,000
Topic: Admission of new partner by investment of new capital: goodwill method LO 4 If the goodwill method is used to record the admission of Gustafson, Forsberg’s capital balance immediately after the addition of Gustafson is: a. b. c. d.
$232,500 $171,000 $109,900 $190,500
ANS:
d $150,000 + (30% x $135,000) = $190,500
Use the following additional information to answer Questions 57 – 60: Now assume Gustafson paid $100,000 for a 20% interest in partnership capital.
©Cambridge Business Publishers, 2023 14-18
Advanced Accounting, 5th Edition
57.
58.
59.
60.
Topic: Admission of new partner by investment of new capital: bonus method LO 4 If the bonus method of admission is used, Gustafson’s capital balance is: a. b. c. d.
$100,000 $103,000 $105,000 $ 95,000
ANS:
c 20% x ($425,000 + 100,000) = $105,000
Topic: Admission of new partner by investment of new capital: bonus method LO 4 If the bonus method is used, Ecklund’s capital balance after the admission of Gustafson is: a. b. c. d.
$95,000 $92,750 $93,500 $97,250
ANS:
b The $5,000 difference ($105,000 – $100,000) between the amount credited to Gustafson and his contribution to the partnership is a reduction in the existing partners' capital accounts; Eklund’s new balance is $95,000 - (45% x $5,000) = $92,750.
Topic: Admission of new partner by investment of new capital: goodwill method LO 4 If the goodwill method is used to record the admission of Gustafson, goodwill will be recorded on the books of the partnership in the amount of: a. b. c. d.
$0 $ 6,250 $ 5,000 $31,250
ANS:
b Total value implied by existing partners’ investment = $425,000/0.8 = $531,250 Goodwill contributed by Gustafson = ($531,250 x 20%) – $100,000 = $6,250
Topic: Admission of new partner by investment of new capital: goodwill method LO 4 If the goodwill method is used to record the admission of Gustafson, his capital balance immediately following admission is: a. b. c. d.
$131,250 $ 93,750 $106,250 $111,250
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-19
ANS: 61.
Topic: Admission of new partner LO 4 Which of the following statements is true concerning a comparison of the bonus and goodwill methods of recording admission of a new partner by investment of new capital? a. b. c. d. ANS:
62.
c $100,000 + $6,250 = $106,250
The goodwill method will typically result in a larger total partnership capital than the bonus method. When the investment by the new partner is less than the new partner's share of the firm's total capital, using the bonus method the capital accounts of the existing partners will increase. When the investment by the new partner is greater than the new partner’s share of the firm’s total capital, using the goodwill method the capital accounts of the existing partners will be reduced. While the bonus method recognizes a new basis of asset valuation when a new partner invests assets in the partnership, the goodwill method does not. a
Topic: Retirement of partner: purchase with personal assets LO 5 Partners in MNO Partnership have capital accounts and income-sharing percentages as follows:
Partner M Partner N Partner O Totals
Capital Balance $150,000 320,000 180,000 $650,000
Income Share 25% 50% 25% 100%
Partners M and N buy Partner O’s interest for $200,000, using their personal assets. The partners retain their relative income-sharing ratio. After this transaction, Partner M’s capital balance is: a. b. c. d.
$195,000 $190,000 $170,000 $210,000
ANS:
d $150,000 + ($180,000 x 1/3) = $210,000
©Cambridge Business Publishers, 2023 14-20
Advanced Accounting, 5th Edition
63.
Topic: Retirement of partner: purchase with personal assets LO 5 J, K and L have been partners for many years. J and K acquire L’s partnership interest for $300,000, using their personal assets. J contributes $100,000 and K contributes $200,000 for the transaction. The partners' capital balances before L's retirement and their income/loss sharing percentages are as follows: Partner J K L Totals
Capital Balance $ 80,000 140,000 228,000 $448,000
Income Share 15% 45% 40% 100%
Assuming J and K maintain their relative income sharing ratio, after L's departure, J's capital balance will be:
64.
a. b. c. d.
$180,000 $137,000 $163,500 $114,200
ANS:
b $80,000 + ($228,000 x 15/60) = $137,000
Topic: Retirement of partner: purchase with personal assets LO 5 A partnership has three partners, Bell, Casey and Duffy, with capital balances of $50,000, $60,000, and $70,000 respectively. The partners share income equally. Duffy retires and is paid using the personal assets of Bell and Casey. Which statement is true concerning the accounting for this transaction? a. b. c. d.
Bell and Casey are required to pay Duffy equal amounts of personal assets, as specified in their income-sharing agreement. Recognition of goodwill is unlikely since there is no arm’s-length transaction. Bell and Casey are required to pay Duffy a total of $70,000. If the total paid to Duffy is more than $70,000, implied goodwill is recognized.
ANS:
b
Use the following information to answer Questions 65 – 72 below. Nunes, Orta and Paulo are partners providing engineering services. Relevant data regarding incomesharing relationships and capital balances are as follows: Partner Capital Balance Income Share Nunes $ 250,000 20% Orta 180,000 30% Paulo 150,000 50% Totals $ 580,000 100% All questions are independent of each other. Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-21
65.
66.
67.
Topic: Retirement of partner through purchase with partnership assets: bonus method LO 5 Paulo decides to retire and receives $185,000 in cash from the partnership. If the bonus method is used to account for the retirement, Nunes’ capital balance after Paulo’s retirement is: a. b. c. d.
$264,000 $236,000 $243,000 $257,000
ANS:
b Nunes’ capital balance is reduced by (20%/50%) x $35,000 bonus to Paulo. $250,000 – (20%/50%) x $35,000 = $236,000.
Topic: Retirement of partner through purchase with partnership assets: bonus method LO 5 Orta decides to retire and receives $166,000 in cash from the partnership. If the bonus method is used to account for the retirement, Paulo’s capital balance after Orta’s retirement is: a. b. c. d.
$140,000 $157,000 $143,000 $160,000
ANS:
d Paulo’s capital balance is increased by (50%/70%) x $14,000 bonus to remaining partners. $150,000 + (50%/70%) x $14,000 = $160,000.
Topic: Retirement of partner through purchase with partnership assets: partial goodwill approach LO 5 Nunes retires and receives $275,000 in cash from the partnership. Partnership net assets are recorded at amounts approximating fair value. If the partial goodwill approach is used, goodwill is recognized in the amount of: a. b. c. d.
$ 75,000 $100,000 $ 25,000 $125,000
ANS:
c Goodwill = $275,000 – $250,000 = $25,000
©Cambridge Business Publishers, 2023 14-22
Advanced Accounting, 5th Edition
68.
69.
70.
Topic: Retirement of partner through purchase with partnership assets: partial goodwill approach LO 5 Paulo retires and receives $160,000 in cash from the partnership. Partnership identifiable net assets are recorded at amounts approximating fair value. If the partial goodwill approach is used, Orta’s capital balance after Paolo’s retirement is: a. b. c. d.
$210,000 $180,000 $220,000 $250,000
ANS:
b The goodwill is credited only to the retiring partner.
Topic: Retirement of partner through purchase with partnership assets: total goodwill approach LO 5 Orta retires and receives $210,000 in cash from the partnership. Partnership net assets are recorded at amounts approximating fair value. If the total goodwill approach is used, goodwill is recognized in the amount of: a. b. c. d.
$ 30,000 $ 90,000 $100,000 $120,000
ANS:
c $30,000/0.3 = $100,000
Topic: Retirement of partner through purchase with partnership assets: total goodwill approach LO 5 Orta retires and receives $210,000 in cash from the partnership. Partnership net assets are recorded at amounts approximating fair value. If the total goodwill approach is used, Paulo’s capital balance after Nunes’ retirement is: a. b. c. d.
$100,000 $212,500 $150,000 $200,000
ANS:
d Paulo’s share of goodwill = 50% x $100,000 = $50,000 $150,000 + $50,000 = $200,000
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-23
71.
72.
73.
Topic: Retirement of partner through purchase with partnership assets: partial goodwill approach LO 5 Nunes retires and receives $215,000 in cash from the partnership. Partnership net assets are recorded at amounts approximating fair value, except its equipment is overvalued. If the partial goodwill approach is used, the equipment account is reduced by: a. b. c. d.
$ 35,000 $ 70,000 $175,000 $ 43,750
ANS:
a Revaluation = $250,000 - $215,000 = $35,000.
Topic: Retirement of partner through purchase with partnership assets: partial goodwill approach LO 5 Nunes retires and receives $215,000 in cash from the partnership. Partnership net assets are recorded at amounts approximating fair value, except its equipment is overvalued. If the total goodwill approach is used, Orta’s capital account after Nunes’ retirement is: a. b. c. d.
$114,375 $232,500 $180,000 $127,500
ANS:
d Equipment revaluation = $35,000/0.2 = $175,000. Orta’s share of revaluation = 30% x $175,000 = $52,500 $180,000 - $52,500 = $127,500
Topic: Retirement of partner LO 5 Dan, Evan and Flora are partners who share income in a 5:4:3 ratio. Each has a capital balance of $150,000. Dan retires from the partnership and is paid $165,000. In recording the retirement, no change was made to Evan's capital account. Which method of recording the retirement was used? a. b. c. d.
Bonus Partial goodwill Total goodwill Transfer of assets
ANS:
b
©Cambridge Business Publishers, 2023 14-24
Advanced Accounting, 5th Edition
74.
Topic: Partnership liquidation LO 6 In a partnership liquidation, the right of offset: a. b. c.
75.
76.
d.
Allows the partner to invest personal assets to bring a negative capital balance to zero. Adds a partnership loan receivable to the capital balance. Requires all the other partners to have positive capital balances, to absorb a partner’s capital deficiency. Adds a partnership loan payable to the capital balance.
ANS:
d
Topic: Partnership liquidation LO 6 If an individual partner is insolvent and the partnership is being liquidated, a creditor may petition the court to specify that any partnership payments to which the individual partner becomes entitled shall be made to the creditor. This specification is called: a. b. c. d.
A charging order Foreclosure The rule of dual priorities The right of offset
ANS:
a
Topic: Partnership simple liquidation LO 6 Primo and Quadros are partners who share income in a 1:3 ratio and have capital balances of $60,000 and $180,000 respectively. Book value of total assets is $500,000, and liabilities total $260,000. Sale of all assets results in total available cash of $350,000. The amount to be distributed to Primo upon liquidation is: a. b. c. d.
$22,500 $60,000 $87,500 $10,000
ANS:
a Loss on asset sale = $350,000 – $500,000 = $(150,000) Capital balances: Prior balance Allocation of $150,000 loss Balance
Test Bank, Chapter 14
Primo $60,000 (37,500) $22,500
Quadros $180,000 (112,500) $ 67,500
©Cambridge Business Publishers, 2023 14-25
77.
Topic: Partnership simple liquidation LO 6 Cisse, Diallo, and Esteves are partners who share income in a 1:2:2 ratio, and have capital balances of $20,000, $120,000, and $65,000 respectively. Book value of total assets is $500,000, and total liabilities are $295,000. Sale of all assets results in total available cash of $360,000. Assuming no further investment by the partners, the amount to be distributed to Diallo upon liquidation is: a. b. c. d.
$ 0 $ 60,000 $ 60,800 $ 64,000
ANS:
b Loss on asset sale = $360,000 – $500,000 = $(140,000) Capital balances: Cisse $ 20,000 (28,000) (8,000) 8,000 $ 0
Prior balance Allocation of $140,000 loss Balance Allocate Cisse’s deficiency Balance
Diallo $120,000 (56,000) 64,000 (4,000) $ 60,000
Esteves $ 65,000 (56,000) 9,000 (4,000) $ 5,000
Use the following information to answer Questions 78 and 79. The balance sheet of the TUV Partnership is as follows: Assets Cash Loan receivable—Upreti Other assets
$ 40,000 40,000 520,000
_______ $600,000
Total
Liabilities Loan payable—Vaswani Other liabilities Total liabilities Capital Talwar Upreti Vaswani Total capital Total
$ 10,000 190,000 200,000 46,000 270,000 84,000 400,000 $600,000
The partners share income in a 3:5:2 ratio. The other assets are sold for $320,000, and no other capital is contributed by any of the partners. 78.
Topic: Partnership simple liquidation LO 6 How much total cash is distributed to Upreti? a. b. c. d.
$160,000 $230,000 $130,000 $120,000
ANS:
d
©Cambridge Business Publishers, 2023 14-26
Advanced Accounting, 5th Edition
79.
Topic: Partnership simple liquidation LO 6 How much total cash is distributed to Vaswani? a. b. c. d.
$94,000 $50,000 $40,000 $54,000
ANS:
b
Notes for Questions 78 and 79: Capital balances: Capital balance Offset loan receivable and loan payable Allocation of $200,000 loss (=$520,000 - $320,000) Balance Allocate Talwar’s deficiency Balance 80.
Talwar $ 46,000 (60,000) (14,000) 14,000 $ 0
Upreti $ 270,000 (40,000) (100,000) 130,000 (10,000) $ 120,000
Vaswani $ 84,000 10,000 (40,000) 54,000 (4,000) $ 50,000
Topic: Partnership liquidation: safe payment LO 6 Sophia and Thomas are in business as the ST partnership. The partnership is undergoing an installment liquidation. Sophia and Thomas share income in a 4:1 ratio, and have current capital balances of $40,000 and $70,000, respectively. $30,000 in cash is available for distribution. Assuming all liabilities have been paid, what is the amount of the safe payment to Thomas? a. b. c. d.
$ 0 $20,000 $24,000 $30,000
ANS:
d Remaining assets after the cash distribution = $40,000 + $70,000 - $30,000 = $80,000 Capital balances: Capital balance Assume $80,000 loss on remaining assets Balance Allocate deficiency Cash distribution
Test Bank, Chapter 14
Sophia $ 40,000 (64,000) (24,000) 24,000 $ 0
Thomas $ 70,000 (16,000) 54,000 (24,000) $ 30,000
©Cambridge Business Publishers, 2023 14-27
81.
82.
Topic: Partnership liquidation: safe payment LO 6 Grayson and Harrison are in business as GH Partnership, which is undergoing an installment liquidation. Grayson and Harrison share income in a 3:2 ratio, and have current capital balances of $120,000 and $100,000, respectively. $80,000 in cash is available for distribution. Assuming all liabilities have been paid, what is the amount of the safe payment to Harrison? a. b. c. d.
0 $44,000 $64,000 $32,000
ANS:
b Remaining assets after the cash distribution = $120,000 + $100,000 - $80,000 = $140,000 Capital balances: Grayson Harrison Capital balance $120,000 $100,000 Assume $140,000 loss on remaining assets (84,000) (56,000) Cash distribution $ 36,000 $ 44,000
Topic: Partnership liquidation: safe payment LO 6 Foster, Gabriel and Harper are in business as FGH Partnership. The partnership has the following balance sheet: Assets Liabilities Cash $ 10,000 Accounts payable $ 20,000 Inventory 25,000 Bank loan payable 80,000 Equipment 365,000 Total liabilities 100,000 Capital Foster 60,000 Gabriel 120,000 Harper 120,000 ______ Total capital 300,000 Total $400,000 Total $400,000 The partners share income in a 1:1:2 ratio. The inventory is sold for $15,000 and equipment with a book value of $150,000 is sold for $100,000. All available cash is distributed to the partners. What is the amount of the safe payment to Gabriel? a. b. c. d.
$ 25,000 $ 18,500 $125,000 $105,000
©Cambridge Business Publishers, 2023 14-28
Advanced Accounting, 5th Edition
ANS:
a Remaining equipment has a book value of $365,000 - $150,000 = $215,000. Capital balances: Capital balance Loss on inventory (total $10,000) Loss on equipment (total $50,000) Balance Assume $215,000 loss on remaining equipment Balance Allocate deficiency Cash distribution
83.
Foster $ 60,000 (2,500) (12,500) 45,000 (53,750) (8,750) 8,750 $ 0
Gabriel $120,000 (2,500) (12,500) 105,000 (53,750) 51,250 (26,250) $ 25,000
Harper $120,000 (5,000) (25,000) 90,000 (107,500) (17,500) 17,500 $ 0
Topic: Partnership liquidation: cash distribution plan LO 6 The DE partnership is undergoing an installment liquidation. Partners D and E share income in a 3:2 ratio and have current capital balances of $63,000 and $90,000, respectively. No loans are receivable from or payable to partners. After outside creditors are paid, if $60,000 in cash becomes available for distribution to the partners, how is it distributed? a. b. c. d.
$60,000 to D; $0 to D; $7,200 to D; $10,800 to D;
ANS:
c
$0 to E $60,000 to E $52,800 to E $49,200 to E
Capital balances Standardize Equalize
Conversion Plan:
Test Bank, Chapter 14
D $ 63,000 105,000 ______ 105,000
E $ 90,000 225,000 (120,000) 105,000
--
$ 48,000
First $48,000 to E. Remaining to D and E in 3:2 ratio. Distribution of $60,000: D = $12,000 x 3/5 = $7,200; E = $48,000 + ($12,000 x 2/5) = $52,800
©Cambridge Business Publishers, 2023 14-29
84.
Topic: Partnership liquidation: cash distribution plan LO 6 Foster, Gabriel and Harper are in business as FGH Partnership. The partnership has the following balance sheet: Assets Cash Inventory Equipment
$ 10,000 25,000 365,000
______ $400,000
Total
Liabilities Accounts payable Bank loan payable Total liabilities Capital Foster Gabriel Harper Total capital Total
$ 20,000 80,000 100,000 60,000 120,000 120,000 300,000 $400,000
The partners share income in a 2:2:1 ratio. In liquidation, what total amount of cash must be distributed to Gabriel and Harper before Foster receives a distribution? a. b. c. d.
$150,000 $180,000 $360,000 $600,000
ANS:
a Capital balance Standardize Equalize Balance Equalize Totals
Foster $ 60,000 150,000 ______ 150,000 ______ $150,000
Gabriel $120,000 300,000 _______ 300,000 (150,000) $150,000
Harper $120,000 600,000 (300,000) 300,000 (150,000) $150,000
$60,000
$60,000 30,000
Conversion
Plan:
First $60,000 to Harper. Next $90,000 to Gabriel and Harper in a 2:1 ratio. Remainder to Foster, Gabriel and Harper in a 2:2:1 ratio
©Cambridge Business Publishers, 2023 14-30
Advanced Accounting, 5th Edition
Use the following information to answer Questions 85 – 87. The VWX partnership is undergoing an installment liquidation. Partners Victoria, Willow, and Xavier share income in a 4:4:2 ratio. The partnership balance sheet is as follows: Assets Cash Accounts receivable Loan receivable—Victoria Other assets
$ 7,000 10,000 15,000 568,000
______ Total
$600,000
Liabilities Accounts payable Loan payable—Willow Total liabilities Capital Victoria Willow Xavier Total capital Total
$ 20,000 30,000 50,000 100,000 250,000 200,000 550,000 $600,000
You are preparing a cash distribution plan for the partnership. Each question below is independent. 85.
86.
Topic: Partnership liquidation: cash distribution plan LO 6 If $240,000 is available to distribute to the partners, how is it distributed? a. b. c. d.
$96,000 to Victoria, $96,000 to Willow, and $48,000 to Xavier $240,000 to Xavier $120,000 to Willow and $120,000 to Xavier $180,000 to Willow and $60,000 to Xavier
ANS:
c Xavier: $60,000 + (2/6 x $180,000) = $120,000 Willow: 4/6 x $180,000 = $120,000
Topic: Partnership liquidation: cash distribution plan LO 6 If $420,000 is available to distribute to the partners, how is it distributed? a. b. c. d.
$280,000 to Willow and $140,000 to Xavier $180,000 to Victoria, $180,000 to Willow, and $60,000 to Xavier $67,500 to Victoria, $255,000 to Willow, and $97,500 to Xavier $27,000 to Victoria, $222,000 to Willow, and $171,000 to Xavier
ANS:
d Xavier: $60,000 + $97,500 + (20% x $67,500) = $171,000 Willow: $195,000 + (40% x $67,500) = $222,000 Victoria: 40% x $67,500 = $27,000
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-31
87.
Topic: Partnership liquidation: cash distribution plan LO 6 A total of $210,000 in cash has been distributed according to the cash distribution plan, and Victoria receives equipment with a fair value of $12,000. How much cash must be distributed to Willow before Victoria receives any further distributions? a. b. c. d.
$ 95,000 $105,000 $115,000 $ 85,000
ANS:
b Distribution of the $210,000 in cash was as follows: Victoria Willow First distribution Second distribution $100,000
Xavier $ 60,000 50,000
Victoria received equipment valued at $10,000. To bring the distributions back to plan, the following must occur: Willow Xavier Second distribution $ 95,000 $47,500 Third distribution 10,000 5,000 Total $105,000 $52,500 Notes for Questions 85 – 87: Capital balances: Capital, net of loan receivable/payable Standardize Equalize Balance Equalize Balance
Victoria $ 85,000 212,500 _______ 212,500 _______ $212,500
Willow $280,000 700,000 _______ 700,000 (487,500) $212,500
Xavier $ 200,000 1,000,000 (300,000) 700,000 (487,500) $ 212,500
$ 195,000
$ 60,000 97,500
Conversion
Plan:
First $60,000 to Xavier. Next $292,500 to Willow and Xavier in 4:2 ratio. Remainder to Victoria, Willow, and Xavier in a 4:4:2 ratio.
©Cambridge Business Publishers, 2023 14-32
Advanced Accounting, 5th Edition
Use the following information to answer Questions 88 – 90. The partners in RST Partnership have decided to liquidate the partnership. Its balance sheet is below. Cash Inventory Equipment Total
$15,000 7,500 37,500 _____ $60,000
Liabilities R, capital S, capital T, capital Total
$ 9,000 10,500 18,000 22,500 $60,000
The partners share income in a 2:3:5 ratio. 88.
89.
Topic: Partnership liquidation: safe payment LO 6 The inventory is sold for $3,000 and the equipment is sold for $22,500. How much does partner S receive in liquidation? a. b. c. d.
$ 8,250 $12,150 $18,000 $21,150
ANS:
b Net loss on sale of assets = $7,500 + $37,500 - $3,000 - $22,500 = $19,500 S receives $18,000 – (30% x $19,500) = $12,150
Topic: Partnership liquidation: safe payment LO 6 Now assume inventory with a book value of $3,750 is sold for $1,500, but the equipment is not yet sold. All available cash is distributed. How much cash is distributed to partner T? a. b. c. d.
$3,750 $2,250 $750 $0
ANS:
c Inventory loss is $3,750 - $1,500 = $2,250. Remaining inventory has a book value of $7,500 - $3,750 = $3,750, and equipment has a book value of $37,500. All remaining assets are assumed to be worthless, for a total loss of $41,250. T receives $22,500 – (50% x ($2,250 + $41,250)) = $750
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-33
90.
Topic: Partnership liquidation: safe payment LO 6 Now assume all the inventory is sold for $3,000, but the equipment is not sold. All available cash is distributed. How much cash is distributed to partner R? a. b. c. d.
$ 2,100 $ 5,400 $11,100 $0
ANS:
a Inventory loss is $7,500 - $3,000 = $4,500. Remaining equipment has a book value of $37,500, assumed worthless. R receives $10,500 – (20% x ($4,500 + $37,500)) = $2,100
©Cambridge Business Publishers, 2023 14-34
Advanced Accounting, 5th Edition
PROBLEMS 1.
Topic: Partnership taxes: Investments in MLPs LO 1 At the beginning of 2024, an investor purchases 10,000 exchange-traded units of Comanche Petroleum Company, which is organized as a Master Limited Partnership. The investment cost $250,000. Taxable income and cash distributions for this investment for 2024 and 2025 are as follows: 2024 2025 Taxable income $ 5,000 $ 7,500 Cash distributions 17,500 19,000 The taxable income is taxed at the investor’s personal tax rate, while the excess cash distribution reduces the basis of the investment. At the time of sale, the basis reduction is taxed at the investor’s personal rate, while the remaining gain is taxed at the capital gains rate. The investor’s personal marginal tax rate is 35%, and the capital gains rate is 15%. The investor sells the investment for $300,000 at the end of 2025. Required a. Prepare a schedule of the total after-tax cash distribution for the investment, for 2024 and 2025. b. Calculate the amount of taxes the investor owes on the sale of the investment at the end of 2025. ANS: a.
b.
Cash distribution Tax on taxable income (taxable income x 35%) Net cash return
2024 $17,500 (1,750) $15,750
Original cost Less 2024 excess cash distribution = $17,500 - $5,000 = Less 2025 excess cash distribution = $19,000 - $7,500 = Basis
$ 250,000 (12,500) (11,500) $ 226,000
Selling price Basis Gain Calculation of tax on gain: Gain taxed at personal rate: ($12,500 + $11,500) x 35% = Gain taxed at capital gains rate: ($74,000 – $24,000) x 15% = Total tax on gain
$ 300,000 (226,000) $ 74,000
Test Bank, Chapter 14
2025 $19,000 (2,625) $16,375
$
8,400 7,500 $ 15,900
©Cambridge Business Publishers, 2023 14-35
2.
Topic: Partnership taxes: Investment in MLPs LO 1 At the beginning of 2022, an investor invests $300,000 in a natural resources partnership organized as a Master Limited Partnership. Taxable income and cash distributions on this investment are:
Taxable income Cash distributions
2022 $2,500 15,000
2023 $2,300 16,000
2024 $3,200 18,000
Taxable income is taxed at the investor’s personal tax rate, while the excess cash distribution reduces the basis of the investment. At the time of sale, the basis reduction is taxed at the investor’s personal rate, while the remaining gain is taxed at the capital gains rate. The investor’s personal marginal tax rate is 35%, and the capital gains rate is 15%. The investor sells the investment for $400,000 at the end of 2024. Required a. Prepare a schedule of the after-tax cash distribution, in dollars, for this investment, for each of the years 2022, 2023, and 2024. b. Calculate the tax on the sale of the investment at the end of 2024. c. Calculate the present value of the investor’s savings from delaying the tax on excess cash distributions. Use a 10% risk-adjusted discount rate, assume taxes are paid at year-end, and round your answer to the nearest dollar. ANS: a. Cash distribution Tax on taxable income (taxable income x 35%) Net cash return b.
2022 $15,000 (875) $14,125
2023 $16,000 (805) $15,195
2024 $18,000 (1,120) $16,880
Calculation of basis:
Original cost Less 2022 excess cash distribution = $15,000 - $2,500 = Less 2021 excess cash distribution = $16,000 - $2,300 = Less 2022 excess cash distribution = $18,000 - $3,200 = Basis
$ 300,000 (12,500) (13,700) (14,800) $ 259,000
Selling price Basis Gain
$ 400,000 (259,000) $ 141,000
Calculation of tax on gain: Gain taxed at personal rate: ($300,000 - $259,000) x 35% = Gain taxed at capital gains rate: ($400,000 – $300,000) x 15% = Total tax on gain
$ 14,350 15,000 $ 29,350
©Cambridge Business Publishers, 2023 14-36
Advanced Accounting, 5th Edition
c. Present value of tax on excess distribution, if paid yearly: (($12,500 x 35%)/1.10) + (($13,700 x 35%)/1.102) + (($14,800 x 35%) /1.103) Present value of tax on excess distribution paid at time of sale: (($12,500 + $13,700 + $14,800) x 35%)/1.103 Present value of delaying tax 3.
$11,826 10,781 $ 1,045
Topic: Partnership formation LO 2 Jagan and Kalap form a partnership. Jagan contributes $500,000 in cash. Kalap contributes assets having the following fair market values: • • •
Merchandise, $75,000 Building, $800,000 Equipment, $200,000
The partnership assumes a mortgage of $250,000 on the building. Required Prepare the entry to record the formation of the partnership, under each of the following methods: a. b. c.
Capital accounts are set equal to net assets invested. The partners have an equal interest in the initial total partnership capital, and the bonus method is used. The partners have an equal interest in the initial total partnership capital, and the goodwill method is used.
ANS: a. Cash Merchandise Building Equipment
500,000 75,000 800,000 200,000 Mortgage payable Capital—Jagan Capital—Kalap
250,000 500,000 825,000
b. Cash Merchandise Building Equipment
500,000 75,000 800,000 200,000 Mortgage payable Capital—Jagan Capital—Kalap
Test Bank, Chapter 14
250,000 662,500 662,500
©Cambridge Business Publishers, 2023 14-37
c.
Jagan contributes $500,000 while Kalap contributes $825,000. contributes $825,000 – $500,000 = $325,000 of goodwill. Cash Merchandise Building Equipment Goodwill
500,000 75,000 800,000 200,000 325,000 Mortgage payable Capital, Jagan Capital, Kalap
4.
Therefore, Jagan
250,000 825,000 825,000
Topic: Partnership formation LO 2 Aubrey and Bella form a partnership in which they will share capital in a 2:3 ratio. Aubrey contributes $200,000 in cash. Bella contributes cash of $100,000 and assets having the following fair market values: • •
Inventory, $150,000 Equipment, $275,000
Required Prepare the entry to record the formation of the partnership, under each of the following methods: a. The bonus approach b. The goodwill approach ANS: a.
Total fair value of net assets contributed = $200,000 + $100,000 + $150,000 + $275,000 = $725,000.
Aubrey Bella
40% x $725,000 60% x $725,000
Capital Balance $290,000 435,000
Entry: Cash Inventory Equipment
300,000 150,000 275,000 Capital—Aubrey Capital—Bella
©Cambridge Business Publishers, 2023 14-38
290,000 435,000
Advanced Accounting, 5th Edition
b.
Bella contributes $525,000 for a 60% interest, so the total value of the partnership is $525,000/0.6 = $875,000.
Aubrey Bella
40% x $875,000 60% x $875,000
Capital Balance $350,000 525,000
Aubrey’s share of capital is $350,000 but she only brings $200,000 in assets to the partnership, so goodwill attributed to Aubrey is $150,000 Entry: Cash Inventory Equipment Goodwill
300,000 150,000 275,000 150,000 Capital—Aubrey Capital—Bella
5.
350,000 525,000
Topic: Partnership formation LO 2 Boon and Chakan form a partnership in which they will share capital in a 3:2 ratio. The fair value of net assets invested by each partner is as follows: • •
Boon contributes $100,000 in cash and $125,000 in inventory. Chakan contributes $50,000 in cash, $45,000 in inventory, and equipment valued at $150,000. The partnership assumes a loan secured by the equipment, in the amount of $75,000.
Required Prepare the balance sheet of the partnership at the date of formation using: a. The bonus approach b. The goodwill approach ANS: a.
Total fair value of net assets contributed: Boon $100,000 + $125,000 = Chakan $50,000 + $45,000 + $150,000 - $75,000 = Total
$225,000 170,000 $395,000
Boon’s capital balance = $395,000 x 60% = $237,000 Chakan’s capital balance = $395,000 x 40% = $158,000 Partnership balance sheet: Assets Cash Inventory Equipment
Total assets Test Bank, Chapter 14
$150,000 170,000 150,000 _______ $470,000
Liabilities Loans payable Capital Capital—Boon Capital—Chakan Total capital Total liabilities and capital
$ 75,000 237,000 158,000 395,000 $470,000
©Cambridge Business Publishers, 2023 14-39
b.
Chakan’s $170,000 contribution implies a total partnership fair value of $170,000/.4 = $425,000. Therefore, total goodwill is $425,000 – $395,000 = $30,000. Boon’s capital balance = $425,000 x 60% = $255,000 Chakan’s capital balance = $425,000 x 40% = $170,000 Assets Cash Inventory Equipment Goodwill
$150,000 170,000 150,000 30,000 _______ $500,000
Total assets 6.
Liabilities Loans payable Capital Capital—Boon Capital—Chakan Total capital Total liabilities and capital
$ 75,000 255,000 170,000 425,000 $500,000
Topic: Partnership formation LO 2 Akashi, Bin, Chion and Daigo form a partnership in which they will share capital in a 1:3:4:2 ratio. The fair value of net assets invested by each partner is as follows: Akashi Bin Chion Daigo
$200,000 500,000 600,000 300,000
Required Calculate the balance in each partner’s capital account at the formation of the partnership using: a. The bonus approach b. The goodwill approach ANS: a.
Total fair value of net assets contributed = $200,000 + $500,000 + $600,000 + $300,000 = $1,600,000
Akashi Bin Chion Daigo Total b.
10% x $1,600,000 30% x $1,600,000 40% x $1,600,000 20% x $1,600,000
Capital Balance $ 160,000 480,000 640,000 320,000 $1,600,000
Akashi contributes $200,000 for a 10% interest, so the total value of the partnership is $200,000/0.1 = $2,000,000.
Akashi Bin Chion Daigo Total ©Cambridge Business Publishers, 2023 14-40
10% x $2,000,000 30% x $2,000,000 40% x $2,000,000 20% x $2,000,000
Capital Balance $ 200,000 600,000 800,000 400,000 $2,000,000 Advanced Accounting, 5th Edition
7.
Topic: Partnership formation LO 2 Renata is the sole proprietor of a company with the following balance sheet: Assets Cash Inventory Plant and equipment, net Total assets
$ 100,000 300,000 600,000 ________ $1,000,000
Liabilities Accounts payable Loan payable Total liabilities Capital Total liabilities and capital
$
50,000 100,000 150,000 850,000 $1,000,000
The cash and inventory are carried at fair value, and plant and equipment has a fair value of $650,000. Renata enters into a partnership with Santiago. Renata contributes her company, and the partnership assumes the company’s liabilities. Santiago contributes cash of $250,000. The partners agree to share capital and profits in a 3:2 ratio. Required Prepare the balance sheet of the partnership at the date of formation using: a. b. ANS: a.
The bonus approach The goodwill approach Total fair value of net assets contributed: Renata $100,000 + $300,000 + $650,000 – $50,000 – $100,000 = $ 900,000 Santiago 250,000 Total $1,150,000 Renata’s capital balance = $1,150,000 x 60% = $690,000 Santiago’s capital balance = $1,150,000 x 40% = $460,000 Partnership balance sheet: Assets Cash Inventory Buildings and equipment
Total assets
Test Bank, Chapter 14
$ 350,000 300,000 650,000
________ $1,300,000
Liabilities Accounts payable Notes payable Total liabilities Capital Capital—Renata Capital—Santiago Total capital Total liabilities and capital
$
50,000 100,000 150,000
690,000 460,000 1,150,000 $1,300,000
©Cambridge Business Publishers, 2023 14-41
b.
Renata’s $900,000 contribution implies a total partnership fair value of $900,000/.6 = $1,500,000. Therefore, total goodwill is $1,500,000 – $1,150,000 = $350,000. Renata’s capital balance = $1,500,000 x 60% = $900,000 Santiago’s capital balance = $1,500,000 x 40% = $600,000 Partnership balance sheet: Assets Cash Inventory Buildings and equipment Goodwill
Total assets 8.
$ 350,000 300,000 650,000 350,000
________ $1,650,000
Liabilities Accounts payable Notes payable Total liabilities Capital Capital—Renata Capital—Santiago Total capital Total liabilities and capital
$ 50,000 100,000 150,000 900,000 600,000 1,500,000 $1,650,000
Topic: Partnership income allocation: salaries LO 3 Reyes and Salazar are partners in RS Services. At the beginning of 2024, their capital balances were $300,000 and $375,000, respectively. The partnership agreement specifies that Reyes receives a salary of $75,000 for the year, and Salazar receives a salary of $125,000. Any remaining income is allocated in a 3:2 ratio. Reyes and Salazar each withdraw their salary in cash at the end of the year, and there are no other investments or withdrawals. Required Compute the balance of each partner’s capital account at the end of 2024, in each of the following situations: a. b. c.
2024 partnership income is $320,000. 2024 partnership income is $150,000 and salaries are fully implemented. 2024 partnership income is $150,000 and salaries are proportionally implemented.
ANS: a. Beginning capital balance Salary Withdrawal of salary Profit distribution ($320,000 – $200,000), allocated 3:2 Ending capital balance
Reyes $300,000 75,000 (75,000) 72,000 $372,000
Salazar $375,000 125,000 (125,000) 48,000 $423,000
Beginning capital balance Salary Withdrawal of salary Loss distribution ($200,000 – $150,000), allocated 3:2 Ending capital balance
Reyes $300,000 75,000 (75,000) (30,000) $270,000
Salazar $375,000 125,000 (125,000) (20,000) $355,000
b.
©Cambridge Business Publishers, 2023 14-42
Advanced Accounting, 5th Edition
c. Reyes $300,000 56,250 (56,250) $300,000
Beginning capital balance Salary ($150,000 in 75:125 ratio) Withdrawal of salary Ending capital balance 9.
Salazar $375,000 93,750 (93,750) $375,000
Topic: Partnership income allocation: Interest LO 3 Santos and Torres are partners in ST Grocery. Their partnership agreement specifies that they share income in a 1:4 ratio after each partner receives 20 percent interest on weighted average capital before any income allocations, which is fully implemented. Their capital transactions for the year are summarized as follows: Santos Torres Capital, January 1 $100,000 $250,000 Investment, April 1 -25,000 Withdrawal, July 1 (10,000) (41,000) Investment, September 1 35,000 -Investment, November 1 -18,000 Withdrawal, December 1 (5,000) (12,000) Capital, December 31 $120,000 $250,000 Partnership income of ST Grocery for the year was $160,000. Required Determine the allocation of partnership income between Santos and Torres. ANS: Weighted average capital calculation: Santos:
$100,000(6/12) + $90,000(2/12) + $125,000(3/12) + $120,000(1/12) = $106,250
Torres:
$250,000(3/12) + $275,000(3/12) + $234,000(4/12) + $252,000(1/12) + $240,000(1/12) = $250,250
Allocation of income: Interest (20% x weighted average capital) Income distribution ($160,000 - $71,300) in 1:4 ratio Total
Test Bank, Chapter 14
Santos $21,250 17,740 $38,990
Torres $50,050 70,960 $121,010
©Cambridge Business Publishers, 2023 14-43
10.
Topic: Partnership income allocation: Salaries, interest, and bonus LO 3 Benoit, Cedric and Dorian are partners in BCD Associates. The partnership agreement provides that income be allocated in the following manner: 1. Each partner receives interest of 15% of beginning capital. 2. Benoit receives an annual salary of $75,000 and Cedric receives an annual salary of $60,000. 3. Dorian receives a bonus of 20% of partnership income after deducting interest, salaries and bonus. 4. Any remaining income is shared in a 2:4:4 ratio. 5. All provisions are to be fully implemented. The partnership income for the year was $300,000. Beginning capital balances are: Benoit $330,000; Cedric $150,000; Dorian $95,000. Required Determine the allocation of partnership income among the partners. ANS: Interest Salary Bonus (1) Remaining balance Total
Benoit $ 49,500 75,000 -13,125 $137,625
Cedric $ 22,500 60,000 -26,250 $108,750
Dorian $14,250 -13,125 26,250 $53,625
Total $ 86,250 135,000 13,125 65,625 $300,000
(1) Calculation of bonus: B = Bonus to Dorian B = ($300,000 – $86,250 – $135,000 – B) x 20% B = $15,750 – 0.20B B = $13,125
11.
Topic: Partnership income allocation: Salaries, interest, and bonus LO 3 Novarro and Ocampo are partners in NO Services. The partnership agreement specifies the following income sharing provisions: 1. Novarro receives an annual salary of $100,000 and Ocampo receives an annual salary of $75,000. 2. Each partner receives 5% interest on average capital investment. 3. Remaining income is allocated in a 2:3 ratio. 4. All provisions are fully implemented. Average capital investment for the year is $350,000 for Novarro and $400,000 for Ocampo. Required a. Prepare a schedule to allocate partnership income of $270,000. b. Prepare a schedule to allocate partnership income of $150,000. c. Suppose that in addition to the above income allocation provisions, Novarro receives a bonus of 20% of profit after the bonus but before other allocation provisions. Prepare a schedule to allocate partnership income of $330,000.
©Cambridge Business Publishers, 2023 14-44
Advanced Accounting, 5th Edition
ANS: a. Salary Interest on capital Residual income Total
Novarro $ 100,000 17,500 23,000 $ 140,500
Ocampo $ 75,000 20,000 34,500 $ 129,500
Salary Interest on capital Residual loss Total
Novarro $ 100,000 17,500 (25,000) $ 92,500
Ocampo $ 75,000 20,000 (37,500) $ 57,500
Salary Interest on capital Bonus (1) Residual income Total
Novarro $ 100,000 17,500 55,000 25,000 $ 197,500
Ocampo $ 75,000 20,000 -37,500 $ 132,500
b.
c.
(1) B = Bonus B = 20% x ($330,000 – B) B = $66,000 – 0.20B B = $55,000
12.
Topic: Partnership income allocation: Bonus LO 3 Partners Kim and Xu receive a yearly salary of $125,000 and $150,000, respectively, plus interest of 5% on weighted average capital for the year. Partnership income for the year, before any distributions to partners, is $400,000. Weighted average capital balances for Kim and Xu are $600,000 and $520,000, respectively. Assume full implementation. Required Calculate the bonus for the year for each partner, in each of the following situations: a. b. c.
Kim gets a bonus of 4 percent of partnership income before distributions. Xu gets a bonus of 25 percent of partnership income after salaries and interest. Kim gets a bonus of 25 percent of partnership income after salaries, interest, and his bonus.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-45
ANS: a.
13.
Kim’s bonus = 4% x $400,000 = $16,000
b.
Xu’s bonus = 25% x [$400,000 - $125,000 - $150,000 – (5% x $600,000) – (5% x $520,000)] = $17,250
c.
Kim’s bonus = 25% x [$400,000 - $125,000 - $150,000 – (5% x $600,000) – (5% x $520,000) - bonus] 1.25 bonus = $17,250 bonus = $13,800
Topic: Partnership income allocation: Bonus LO 3 Partners Vlado and Petra receive a yearly salary of $100,000 and $120,000, respectively, plus interest of 10% on weighted average capital. Partnership income for the year, before any distributions to partners, is $600,000. Weighted average capital balances for Vlado and Petra are $200,000 and $250,000, respectively. Assume full implementation. Required Calculate each partner’s bonus for the year, in each of the following situations. Round your answers to the nearest dollar, if necessary. a. b. c.
Vlado gets a bonus of 20% of partnership income after salaries and interest, and Petra gets a bonus of 20% of partnership income after salaries, interest, and both bonuses. Vlado and Petra each get a bonus of 20% of partnership income after salaries, interest, and both bonuses. Vlado gets a bonus of 20% of partnership income after salaries, interest, and both bonuses, and Petra gets a bonus of 10% of partnership income partnership income after salaries, interest, and both bonuses.
ANS: V = Vlado’s bonus P = Petra’s bonus a. $600,000 - $100,000 - $120,000 – (10% x $200,000) – (10% x $250,000) = $335,000 V = 20% x $335,000 = $67,000 P = 20% x ($335,000 - $67,000 – P) P = $44,667 b. V = P V = 20% x ($335,000 – V – P) V = 20% x ($335,000 – 2V) V = $47,857 P = $47,857 c. P = ½ V V = 20% x ($335,000 – V – P) V = 20% x ($335,000 – 1.5V) V = $51,538 P = ½ V = $25,769 ©Cambridge Business Publishers, 2023 14-46
Advanced Accounting, 5th Edition
14.
Topic: Admission of a new partner by purchase of existing partnership interest LO 4 Jacob and Kyle are partners in JK Construction Services. Their capital accounts are currently as follows: Jacob $460,000 Kyle 340,000 Total capital $800,000 Jacob and Kyle share income equally. Partnership identifiable net assets are reported at amounts approximating fair value. Lester purchases a 20 percent interest in the partnership by paying Jacob and Kyle a total of $175,000 for 20 percent of each of their interests in the partnership. Required Record the addition of Lester to the partnership, using: a. b.
The transfer of capital interests method The implied goodwill method
ANS: a. Capital—Jacob Capital—Kyle
92,000 68,000 Capital—Lester
160,000
b. Goodwill (1)
75,000 Capital—Jacob Capital—Kyle
37,500 37,500
Capital—Jacob Capital—Kyle
99,500 75,500 Capital—Lester
175,000
(1) Calculation of goodwill: $175,000/.2 = $875,000 - $800,000 = $75,000
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-47
15.
Topic: Admission of a new partner by purchase of existing partnership interest; change in control LO 4 Thane and Ulrich are partners in TU Consulting Services, sharing partnership income in a 3:2 ratio. The partners want to reduce their involvement in the partnership by bringing in a third partner to take over most of the responsibilities. Volker purchases a 60 percent interest in the partnership by paying Thane and Ulrich a total of $360,000 for 60 percent of each of their interests. Volker will take control of partnership activities, with Thane and Ulrich providing support services as needed. The partnership balance sheet immediately prior to admission of Volker is as follows: Assets Cash Supplies Equipment
Total assets
$ 50,000 120,000 460,000
________ $630,000
Liabilities Accounts payable Notes payable Total liabilities Capital Capital—Thane Capital—Ulrich Total capital Total liabilities and capital
$
80,000 200,000 280,000 100,000 250,000 350,000 $630,000
Because there is a change in control, the partners decide that revaluation of partnership assets is appropriate. The supplies have a fair value of $150,000, and the equipment has a fair value of $520,000. There are no unrecorded identifiable assets. Required a. Record the addition of Volker to the partnership, using the implied goodwill method. b. Present the partnership balance sheet immediately following Volker’s admission. ANS: a.
$360,000/0.6 = $600,000 implied value of partnership. Total required revaluation = $600,000 - $350,000 = $250,000. Goodwill = $250,000 – ($150,000 - $120,000) – ($520,000 - $460,000) = $160,000 Supplies Equipment Goodwill
30,000 60,000 160,000 Capital—Thane Capital—Ulrich
Capital—Thane Capital—Ulrich
150,000 210,000 Capital—Volker
©Cambridge Business Publishers, 2023 14-48
150,000 100,000
360,000
Advanced Accounting, 5th Edition
b. Assets Cash Supplies Equipment Goodwill
Total assets 16.
$ 50,000 150,000 520,000 160,000
________ $880,000
Liabilities Accounts payable Notes payable Total liabilities Capital Capital—Thane Capital—Ulrich Capital—Volker Total capital Total liabilities and capital
$
80,000 200,000 280,000 100,000 140,000 360,000 600,000 $880,000
Topic: Admission of a new partner by investment of new capital LO 4 Donner and Eldridge are partners in DE Delivery Express Services. Donner and Eldridge share capital and income equally. Donner has a capital balance of $100,000 and Eldridge has a capital balance of $120,000. The partnership’s identifiable net assets are carried at amounts approximating fair value. Slade is to be admitted as a new partner, receiving a 20% interest in capital and income. Required a. Slade pays $55,000 in cash to the partnership. Record Slade’s admission. b. Slade pays $40,000 in cash to the partnership. Record Slade’s admission, using: 1. The bonus method 2. The goodwill method c. Slade pays $75,000 in cash to the partnership. Record Slade’s admission, using: 1. The bonus method 2. The goodwill method ANS: a.
Slade’s share of partnership net assets is 20% x ($100,000 + $120,000 + $55,000) = $55,000, which is the same as Slade’s investment. Entry: Cash
55,000 Capital—Slade
b.1.
55,000
Slade’s share of partnership net assets is 20% x ($100,000 + $120,000 + $40,000) = $52,000. Entry: Cash Capital—Donner Capital—Eldridge
40,000 6,000 6,000 Capital—Slade
Test Bank, Chapter 14
52,000
©Cambridge Business Publishers, 2023 14-49
b.2.
$220,000/0.8 = $275,000 value of new partnership. Slade’s share of new partnership = 20% x $275,000 = $55,000. Slade contributes $40,000, so $15,000 of goodwill is contributed. Entry: Cash Goodwill
40,000 15,000 Capital—Slade
c.1.
55,000
Slade’s share of partnership net assets is 20% x ($100,000 + $120,000 + $75,000) = $59,000. Entry: Cash
75,000 Capital—Donner Capital--Eldridge Capital—Slade
c.2.
8,000 8,000 59,000
$75,000/0.2 = $375,000 value of new partnership Total identifiable net assets = $100,000 + $120,000 + $75,000 = $295,000. Therefore, partnership net assets are understated by $375,000 - $295,000 = $80,000. Entry: Cash Goodwill
75,000 80,000 Capital—Donner Capital--Eldridge Capital—Slade
17.
40,000 40,000 75,000
Topic: Admission of a new partner by investment of new capital LO 4 Quintana and Ruiz are partners in QR Services. The partners share income in a 2:3 ratio. Quintana has a capital balance of $300,000 and Ruiz has a capital balance of $450,000. The partnership’s identifiable net assets are carried at amounts approximating fair value, except for equipment, which is undervalued by $100,000. Sandoval is to be admitted as a new partner, investing cash of $275,000 in the partnership and receiving a 20 percent interest in capital and income. Required Record Sandoval’s admission, using: a. The bonus method b. The goodwill method ANS: a.
Sandoval’s share of partnership net assets is 20% x ($750,000 + $275,000) = $205,000 Entry: Cash
275,000 Capital—Quintana Capital—Ruiz Capital—Sandoval
©Cambridge Business Publishers, 2023 14-50
28,000 42,000 205,000 Advanced Accounting, 5th Edition
b.
$275,000/0.2 = $1,375,000 – $1,025,000 = $350,000 Revaluations: $100,000 to equipment, $250,000 to goodwill Entry: Cash Equipment Goodwill
275,000 100,000 250,000 Capital—Quintana Capital—Evans Capital—Foster
18.
140,000 210,000 275,000
Topic: Admission of a new partner by investment of new capital LO 4 Rahal and Saliba are partners who share income in a 1:4 ratio. Total partnership capital is $375,000. Partnership net assets are reported at amounts approximating fair value. Touma is to be admitted as a new partner, investing $120,000 in the partnership and receiving a 25% interest in capital and income. Required Record Touma’s admission, using: a. The bonus method b. The goodwill method ANS: a.
Touma’s share of partnership net assets is 25% x ($375,000 + $120,000) = $123,750 Entry: Cash Capital—Rahal Capital—Saliba
120,000 750 3,000 Capital—Touma
b.
123,750
$375,000/0.75 = $500,000 x 25% = $125,000 Entry: Cash Goodwill
120,000 5,000 Capital—Touma
Test Bank, Chapter 14
125,000
©Cambridge Business Publishers, 2023 14-51
19.
Topic: Admission of a new partner by investment of new capital LO 4 Bava and Char are partners in BC Enterprises, providing systems support to small companies. The partners share income in a 3:1 ratio. The partnership balance sheet is as follows: Assets Cash Supplies Property, net
Total assets
$ 65,000 45,000 460,000
______ $570,000
Liabilities Accounts payable Notes payable Total liabilities Capital Capital—Bava Capital—Char Total capital Total liabilities and capital
$ 40,000 175,000 215,000 200,000 155,000 355,000 $570,000
Dey is to be admitted as a new partner, investing $20,000 in cash and property with a fair value of $80,000 in the partnership, and receiving a 10 percent interest in capital and income. Appraisal of partnership net assets reveals that current property has a fair value of $500,000 and there are unreported identifiable intangible assets of $75,000. Required Prepare the partnership balance sheet following Dey’s admission to the partnership, using: a. The bonus method b. The goodwill method ANS: a.
Dey’s share of partnership net assets is 10% x ($355,000 + $100,000) = $45,500 The entry to record Dey’s admission is: Cash Property, net Capital—Bava Capital—Char Capital—Dey The partnership balance sheet is: Assets Cash $ 85,000 Supplies 45,000 Property, net 540,000
Total assets
©Cambridge Business Publishers, 2023 14-52
_______ $670,000
20,000 80,000 40,875 13,625 45,500
Liabilities Accounts payable Notes payable Total liabilities
$ 40,000 175,000 215,000
Capital Capital—Bava Capital—Char Capital—Dey Total capital Total liabilities and capital
240,875 168,625 45,500 455,000 $670,000
Advanced Accounting, 5th Edition
b.
$100,000/0.10 = $1,000,000 Net assets are understated by $1,000,000 – ($355,000 + $100,000) = $545,000 The entry to record Dey’s admission is: Cash Property, net (1) Identifiable intangibles Goodwill Capital—Bava Capital—Char Capital—Dey
20,000 120,000 75,000 430,000 408,750 136,250 100,000
(1) $40,000 revaluation of current facilities plus $80,000 equipment contributed by Dey.
The partnership balance sheet is: Assets Cash $ 85,000 Supplies 45,000 Property, net 580,000 Identifiable intangibles 75,000 Goodwill 430,000
Total assets 20.
________ $1,215,000
Liabilities Accounts payable Notes payable Total liabilities Capital Capital—Bava Capital—Char Capital—Dey Total capital Total liabilities and capital
$
40,000 175,000 215,000
608,750 291,250 100,000 1,000,000 $1,215,000
Topic: Admission of new partner by investment of new capital LO 4 LM Consultants, formed by partners Langley and Mars, has the following balance sheet at the beginning of the year. Langley and Mars share income in a 1:4 ratio. Current assets Property, net Total
$ 270,000 Liabilities 1,800,000 Langley, capital _______ Mars, capital $2,070,000
$ 810,000 340,000 920,000 $2,070,000
Needham joins the partnership for a payment of $1,500,000. Needham will have a 50% interest in the partnership, and Langley, Mars and Needham will share income in a 1:4:5 ratio. Required a. Prepare the partnership balance sheet immediately after Needham is admitted, under each of these three scenarios: (1) The bonus method is used to record Needham’s admission. (2) The goodwill method is used to record Needham’s admission, and the revaluation of partnership net assets is attributable to goodwill. (3) The goodwill method is used to record Needham’s admission, and the revaluation of partnership net assets is attributable 80% to undervalued property, and 20% to goodwill.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-53
b.
c.
ANS: a.
Assume that partnership income for the year, before depreciation and amortization, is $300,000. Goodwill is unimpaired, and property is depreciated over 20 years, straightline. How much total partnership income is shared among the partners under each of the three scenarios? Assume that partnership income for the year, before depreciation and amortization, is $300,000. It is determined that the goodwill should be written off, and property is depreciated over 20 years, straight-line. How much total partnership income is shared among the partners, under each of the three scenarios? (1)
Bonus method Needham should pay 50% x ($1,260,000 + $1,500,000) = $1,380,000, so the bonus to existing partners is ($1,500,000 - $1,380,000) = $120,000, shared between Langley and Mars in a 1:4 ratio. Current assets Property, net
Total (2)
$ 1,770,000 Liabilities 1,800,000 Langley, capital Mars, capital _______ Needham, capital $3,570,000
$ 810,000 364,000 1,016,000 1,380,000 $3,570,000
Goodwill to existing partners, attributable to goodwill $1,500,000/0.2 = $3,000,000 – ($1,260,000 + $1,500,000) = $240,000 goodwill, shared 1:4 among existing partners. Current assets Property, net Goodwill Total
$ 1,770,000 1,800,000 240,000 _______ $3,810,000
Liabilities Langley, capital Mars, capital Needham, capital
$ 810,000 388,000 1,112,000 1,500,000 $3,810,000
$ 1,770,000 1,992,000 48,000 _______ $3,810,000
Liabilities Langley, capital Mars, capital Needham, capital
$ 810,000 388,000 1,112,000 1,500,000 $3,810,000
(3) Current assets Property, net Goodwill Total b.
(1) (2) (3)
$300,000 – ($1,800,000/20) = $210,000 $300,000 – ($1,800,000/20) = $210,000 $300,000 – ($1,992,000/20) = $200,400
c.
(1) (2) (3)
$300,000 – ($1,800,000/20) = $210,000 $300,000 – ($1,800,000/20) - $240,000 = $(30,000) $300,000 – ($1,992,000/20) - $48,000 = $152,400
©Cambridge Business Publishers, 2023 14-54
Advanced Accounting, 5th Edition
21.
Topic: Retirement of a partner using partnership assets LO 5 Nazarov, Osin and Panarin are partners with capital accounts of $300,000, $162,000 and $210,000 respectively. Income is shared in a 5:3:2 ratio. Osin resigns from the partnership and receives $180,900 in partnership cash. All recorded partnership net assets are currently reported at amounts approximating fair value. Required Record Osin’s resignation on the partnership books, using: a. The bonus method b. The partial goodwill approach c. The total goodwill approach ANS: a.
Osin receives $180,900 - $162,000 = $18,900 bonus; reduction in capital accounts of remaining partners in a 5:2 ratio. Capital—Nazarov Capital—Panarin
13,500 5,400 Capital—Osin
18,900
Capital—Osin
180,900 Cash
180,900
b. Goodwill Capital—Osin
18,900 162,000 Cash
c.
180,900
($180,900 – $162,000)/0.3 = $63,000 Goodwill
63,000 Capital—Nazarov Capital—Osin Capital—Panarin
Capital—Osin
180,900 Cash
Test Bank, Chapter 14
31,500 18,900 12,600
180,900
©Cambridge Business Publishers, 2023 14-55
22.
Topic: Retirement of a partner using partnership assets LO 5 Harry, Izzy, and Jake are partners who share income in a 6:4:2 ratio. Jake, whose capital balance is $40,000, retires from the partnership, and receives partnership assets. Required Determine the amount paid to Jake under each of the following assumptions: a. The partial goodwill approach is used and $15,000 of goodwill is recorded. b. The bonus method is used and Izzy's capital account is reduced by $20,000. c. The total goodwill approach is used, and Harry's capital account increases by $30,000. ANS: a. b. c.
23.
$40,000 + $15,000 = $55,000 $20,000/0.4 = $50,000 + $40,000 = $90,000 $30,000/0.5 = $60,000 x 2/12 = $10,000 + $40,000 = $50,000
Topic: Retirement of a partner: Alternative scenarios LO 5 Miura, Nakagawa and Ono have interests in MNO Partnership. The partners have capital balances of $200,000, $160,000, and $140,000 respectively, and share income in a 5:3:2 ratio. Ono is retiring from the partnership. Required Record the entry or entries needed under each of the following circumstances: a. Miura and Nakagawa buy Ono’s interest using $180,000 of their personal cash. Miura and Nakagawa retain the same income-sharing relationship as before. b. Miura and Nakagawa buy Ono’s interest using $180,000 of partnership cash. Miura and Nakagawa retain the same income-sharing relationship as before. The bonus method is used. c. Miura and Nakagawa buy Ono’s interest by transferring ownership of partnership equipment valued at $180,000. The equipment is currently reported on the partnership books at $150,000. The total goodwill approach is used, and the partnership’s other net assets are reported at amounts approximating fair value. ANS: a. Capital—Ono
140,000 Capital—Miura Capital—Nakagawa
87,500 52,500
b. Capital—Miura Capital—Nakagawa Capital—Ono
25,000 15,000 140,000 Cash
©Cambridge Business Publishers, 2023 14-56
180,000
Advanced Accounting, 5th Edition
c.
Adjust the equipment to fair value: Equipment, net
30,000 Capital—Miura Capital—Nakagawa Capital—Ono
15,000 9,000 6,000
Ono’s capital account balance is now $140,000 + $6,000 = $146,000 ($180,000 – $146,000)/0.2 = $170,000 Goodwill
170,000 Capital—Miura Capital—Nakagawa Capital—Ono
Capital—Ono
85,000 51,000 34,000 180,000
Equipment, net 24.
180,000
Topic: Retirement of a partner using partnership assets: Alternative methods LO 5 Norman, Olivia and Patty are partners with capital accounts of $400,000, $650,000 and $200,000 respectively. Income is shared in a 1:3:1 ratio. Norman resigns from the partnership and receives $350,000 in partnership cash. Required Record Norman’s resignation on the partnership books, under each of the following assumptions: a. The bonus method is used. b. The partial goodwill approach is used, and partnership buildings and equipment are determined to be overvalued by $250,000. c. The total goodwill approach is used, and partnership buildings and equipment are determined to be overvalued by $250,000. ANS: a. Capital—Norman
400,000 Capital—Olivia Capital—Patty Cash
37,500 12,500 350,000
b. Capital—Norman
c.
400,000
Buildings and equipment, net 50,000 Cash 350,000 Only Norman’s share of the B&E write-down is recorded: $50,000 = 20% x $250,000. Capital—Norman Capital—Olivia Capital—Patty
400,000 150,000 50,000 Buildings and equipment, net Cash
Test Bank, Chapter 14
250,000 350,000
©Cambridge Business Publishers, 2023 14-57
25.
Topic: Partnership balance sheet after retirement: Alternative methods LO 5 Citycollective is a partnership providing media support services to small local businesses. Its balance sheet is as follows: Assets Cash Property, net
Total assets
$ 220,000 250,000
______ $470,000
Liabilities Accounts payable Capital Capital—Feldman Capital—Gladstone Capital—Hart Total capital Total liabilities and capital
$ 25,000 220,000 125,000 100,000 445,000 $470,000
Partners Feldman, Gladstone and Hart share income in a 1:4:5 ratio. Hart decides to retire, and the partnership agrees to pay Hart $150,000. Partnership property has a fair value of $280,000. Required Present the partnership balance sheet after Hart’s retirement, in each of the following situations: a. b. ANS: a.
The bonus method is used. The full goodwill approach is used, and the excess payment to Hart is attributed to undervalued property and goodwill. Entry to record Hart’s departure (not required): Capital—Hart Capital—Feldman Capital—Gladstone Cash
100,000 10,000 40,000 150,000
Partnership balance sheet following Hart’s departure: Assets Liabilities Cash $ 70,000 Accounts payable Property, net 250,000 Capital Capital—Feldman Capital—Gladstone ______ Total capital Total assets $320,000 Total liabilities and capital
©Cambridge Business Publishers, 2023 14-58
$ 25,000 210,000 85,000 295,000 $320,000
Advanced Accounting, 5th Edition
b.
Total write-up = ($150,000 - $100,000)/0.5 = $100,000. Entry to record Hart’s departure (not required): Capital—Hart Property, net Goodwill Capital—Feldman Capital—Gladstone Cash
100,000 30,000 70,000
Partnership balance sheet following Hart’s departure: Assets Liabilities Cash $ 70,000 Accounts payable Property, net 280,000 Capital Goodwill 70,000 Capital—Feldman Capital—Gladstone ______ Total capital Total assets $420,000 Total liabilities and capital 26.
10,000 40,000 150,000
$ 25,000 230,000 165,000 395,000 $420,000
Topic: Partnership balance sheet after retirement: Alternative methods LO 5 CityTech is a partnership providing technology services to local businesses. Its balance sheet is as follows: Assets Cash Receivables Supplies Buildings & equipment, net
Total assets
$ 270,000 50,000 20,000 1,500,000
___ __ $1,840,000
Liabilities Accounts payable Loans payable Total liabilities Capital Capital—Orr Capital—Pratt Capital—Quinn Total capital Total liabilities and capital
$ 100,000 400,000 500,000 130,000 650,000 560,000 1,340,000 $1,840,000
Partners Orr, Pratt, and Quinn share income in a 4:3:3 ratio. Orr decides to leave the partnership, and the partnership agrees to pay Orr $250,000 in cash. Partnership assets have fair values as follows: supplies, $25,000; buildings & equipment, $1,600,000. Other partnership identifiable assets and liabilities are reported at amounts approximating fair value. Required Present the partnership balance sheet after Orr’s retirement, in each of the following situations: a. The bonus method is used. b. The partial goodwill approach is used, and the partnership’s identifiable assets are revalued to fair value. c. The full goodwill approach is used, and the partnership’s identifiable assets are revalued to fair value.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-59
ANS: a. Entry to record Orr’s departure (not required): Capital—Orr Capital—Pratt Capital—Quinn Cash
130,000 60,000 60,000 250,000
Partnership balance sheet following Orr’s departure: Assets Cash Receivables Supplies Buildings & equipment, net
Total assets b.
$ 20,000 50,000 20,000 1,500,000
___ __ $1,590,000
Liabilities Accounts payable Loans payable Total liabilities Capital Capital—Pratt Capital—Quinn Total capital Total liabilities and capital
Entry to record Orr’s departure (not required): Capital—Orr Supplies Buildings & equipment Goodwill Cash
$ 100,000 400,000 500,000 590,000 500,000 1,090,000 $1,590,000
130,000 5,000 100,000 15,000 250,000
Partnership balance sheet following Orr’s departure:
c.
Assets Cash Receivables Supplies Buildings & equipment, net Goodwill
$ 20,000 50,000 25,000 1,600,000 15,000
Total assets
___ __ $1,710,000
Liabilities Accounts payable Loans payable Total liabilities Capital Capital—Pratt Capital—Quinn Total capital Total liabilities and capital
$ 100,000 400,000 500,000 650,000 560,000 1,210,000 $1,710,000
Total value increase = ($250,000 - $130,000)/0.4 = $300,000 Goodwill = $300,000 - $5,000 - $100,000) = $195,000 Entry to record Orr’s departure (not required): Capital—Orr Supplies Buildings & equipment Goodwill Capital—Pratt Capital—Quinn Cash
©Cambridge Business Publishers, 2023 14-60
130,000 5,000 100,000 195,000 90,000 90,000 250,000
Advanced Accounting, 5th Edition
Partnership balance sheet following Orr’s departure:
27.
Assets Cash Receivables Supplies Buildings & equipment, net Goodwill
$ 20,000 50,000 25,000 1,600,000 195,000
Total assets
___ __ $1,890,000
Liabilities Accounts payable Loans payable Total liabilities Capital Capital—Pratt Capital—Quinn Total capital Total liabilities and capital
$ 100,000 400,000 500,000 740,000 650,000 1,390,000 $1,890,000
Topic: Simple partnership liquidation LO 6 The balance sheet of a partnership, which is being liquidated, is as shown: Assets Cash Receivables Inventory Property, net
$ 5,000 100,000 260,000 500,000
_______ $865,000
Total
Liabilities Accounts payable Bank loan payable Total liabilities Capital Partner E Partner F Partner G Total capital Total
$ 90,000 200,000 290,000 85,000 270,000 220,000 575,000 $865,000
The partners share income in a 2:5:3 ratio. The receivables yield $65,000 in cash. The inventory is sold for $140,000 and the property is sold for $520,000. Required Determine the total cash available for distribution and its proper distribution to the creditors and the partners. ANS: Cash available = $5,000 + $65,000 + $140,000 + $520,000 = $730,000
Capital balances Loss on receivables ($35,000) Loss on inventory ($120,000) Gain on property ($20,000) Cash distribution Final cash distribution: Creditors Partner E Partner F Partner G Total Test Bank, Chapter 14
E $ 85,000 (7,000) (24,000) 4,000 $ 58,000
F $270,000 (17,500) (60,000) 10,000 $202,500
G $220,000 (10,500) (36,000) 6,000 $179,500
$290,000 58,000 202,500 179,500 $730,000 ©Cambridge Business Publishers, 2023 14-61
28.
Topic: Simple partnership liquidation LO 6 The balance sheet of the ABC Partnership, which is being liquidated, is as shown: Assets Cash Receivables Inventory Property, net
$ 25,000 40,000 60,000 275,000
_______ $400,000
Total
Liabilities Accounts payable Bank loan payable Total liabilities Capital Acton Brock Cohen Total capital Total
$ 70,000 100,000 170,000 45,000 85,000 100,000 230,000 $400,000
The partners share income in a 3:4:3 ratio. The receivables yield $35,000 in cash. The inventory and property are sold for $280,000. Required Determine the total cash available for distribution and its proper distribution to the creditors and the partners. ANS: Cash available = $25,000 + $35,000 + $280,000 = $340,000
Capital balances Loss on receivables ($5,000) Loss on inventory and property ($55,000) Cash distribution Final cash distribution: Creditors Acton Brock Cohen Total
©Cambridge Business Publishers, 2023 14-62
Acton $ 45,000 (1,500) (16,500) $ 27,000
Brock $ 85,000 (2,000) (22,000) $ 61,000
Cohen $ 100,000 (1,500) (16,500) $ 82,000
$170,000 27,000 61,000 82,000 $340,000
Advanced Accounting, 5th Edition
29.
Topic: Simple partnership liquidation LO 6 The balance sheet of JKL Partnership prior to liquidation is as follows: Assets Loan receivable—Jackson Other assets
Liabilities Loan payable-Layton $ 70,000 Other liabilities 40,000 Total liabilities 110,000 Capital Capital—Jackson 30,000 Capital—Kroll 20,000 _______ Capital—Layton 90,000 Total capital 140,000 Total $250,000 Total $250,000 Jackson, Kroll, and Layton share income in a 2:2:4 ratio. The partners are unable to make any additional investments in the partnership. The other assets are sold for $80,000 in cash. $ 50,000 200,000
Required Determine the proper distribution of the $80,000 in available cash. ANS: Capital balances Offset loan payable/receivable Balance Loss on asset sale Balance Allocate deficiencies Cash distribution
Jackson $ 30,000 (50,000) (20,000) (30,000) (50,000) 50,000 $ 0
Kroll $ 20,000 -20,000 (30,000) (10,000) 10,000 $ 0
Layton $ 90,000 70,000 160,000 (60,000) 100,000 (60,000) $ 40,000
Final cash distribution: Creditors Layton Total
Test Bank, Chapter 14
$40,000 40,000 $80,000
©Cambridge Business Publishers, 2023 14-63
30.
Topic: Partnership liquidation: safe payment plan LO 6 The JKL Partnership has the following balance sheet at February 1: Assets Cash Receivables Inventory Plant & equipment
$ 10,000 25,000 100,000 500,000
_______ $ 635,000
Liabilities Accounts payable Bank loan payable Total liabilities Capital Capital—Johnston Capital—Kelly Capital—Lynch Total capital
$ 40,000 180,000 220,000 120,000 100,000 195,000 415,000 $ 635,000
The partners share income in a 3:2:5 ratio. The partnership liquidated during the period February 1 to March 31. Events for each month are as follows: February 1. Collected receivables of $20,000 and wrote off the remaining receivables. 2. Sold half the inventory for $40,000. 3. Sold half the plant & equipment for $179,000. 4. Retained $10,000 in cash for unplanned expenditures. March 1. Sold the remaining balance of inventory for $20,000. 2. Sold the remaining balance of plant & equipment for $160,000. 3. Distributed all remaining cash. Required a. Calculate the cash available for distribution to the partners at the end of February and prepare a schedule to determine the safe payments to each partner. b. Calculate the cash available for distribution to the partners at the end of March and prepare a schedule to determine the safe payments to each partner. ANS: a. Receivables collection Inventory sale Plant & equipment sale Less payment to creditors Cash available to partners
©Cambridge Business Publishers, 2023 14-64
$ 20,000 40,000 179,000 (220,000) $ 19,000
Advanced Accounting, 5th Edition
February February 1 capital balance Receivables loss Inventory loss Plant & equipment loss February 28 capital balance before distribution Potential losses: Inventory Plant & equipment Cash reserve Allocate deficit Allocate deficit Safe payments
Johnston $120,000 (1,500) (3,000) (21,300)
Kelly $100,000 (1,000) (2,000) (14,200)
Lynch $ 195,000 (2,500) (5,000) (35,500)
94,200
82,800
152,000
(15,000) (75,000) (3,000) 1,200 (1,800) (600) 600 --
(10,000) (50,000) (2,000) 20,800 (1,200) 19,600 (600) $ 19,000
(25,000) (125,000) (5,000) (3,000) 3,000 --$ --
b. Inventory sale Plant & equipment sale Cash reserve Cash available to partners March February 28 capital balance before distribution February distribution March 1 capital balance Inventory loss Plant & equipment loss Safe payments
Test Bank, Chapter 14
20,000 160,000 10,000 $ 190,000 Johnston
Kelly
Lynch
$94,200 -94,200 (9,000) (27,000) $58,200
$82,800 (19,000) 63,800 (6,000) (18,000) $39,800
$152,000 -152,000 (15,000) (45,000) $92,000
©Cambridge Business Publishers, 2023 14-65
31.
Topic: Partnership liquidation: Safe payments and cash distribution plan LO 6 Partners Anise, Belize, and Chignon have decided to liquidate their partnership. The partnership balance sheet is below. Inventory Building, net Equipment, net Total
$ 55,000 350,000 300,000 ______ $705,000
Liabilities Anise, capital Belize, capital Chignon, capital Total
$110,000 189,000 181,000 225,000 $705,000
The partners share income in a 3:4:3 ratio. In the first step of the liquidation, inventory with a book value of $15,000 is sold for $10,000, and equipment with a book value of $120,000 is sold for $150,000. All available cash, after paying liabilities, is distributed to the partners. Required a. Using the safe payment approach, determine the cash distribution to each partner. b. Prepare the cash distribution plan for the partnership, and use it to determine the cash distribution to each partner. ANS: a. Capital balance Inventory loss ($5,000) Equipment gain ($30,000) Loss on remaining assets ($40,000 + $350,000 + $180,000) Allocate deficiency Safe payments
Anise $189,000 ( 1,500) 9,000
Belize $181,000 (2,000) 12,000
Chignon $225,000 (1,500) 9,000
(171,000) 25,500 (18,500) $ 7,000
(228,000) (37,000) 37,000 $ --
(171,000) 61,500 (18,500) $43,000
Anise $189,000 630,000 -630,000 (177,500) 452,500
Belize $181,000 452,500 -452,500 -452,500
Chignon $225,000 750,000 (120,000) 630,000 (177,500) 452,500
Distribution: $110,000 to creditors $ 7,000 to Anise $ 43,000 to Chignon b. Capital balance Standardize Equalize Balance Equalize Balance Conversion $ 53,250
©Cambridge Business Publishers, 2023 14-66
$ 36,000 53,250
Advanced Accounting, 5th Edition
Cash distribution plan: After creditors are paid, First $36,000 to Chignon Next $106,500 equally between Anise and Chignon Remaining cash shared with all partners in a 3:4:3 ratio Distribution of $160,000 - $110,000 = $50,000 to partners: $36,000 + ($14,000/2) = $43,000 to Chignon $14,000/2 = $7,000 to Anise 32.
Topic: Partnership liquidation: cash distribution plan LO 6 MNO Enterprises, a partnership, is about to begin liquidation. It is anticipated that the process of selling the company's assets will occur over time. However, the partners would like to receive cash distributions as asset sales occur. Capital accounts and income sharing percentages are as follows: Capital Balance $150,000 210,000 110,000 $470,000
Maya Smith Norton Johnson Oswald Brown Total
Income Share 30% 15% 55% 100%
Partnership liabilities total $500,000. Required a. Prepare a cash distribution plan. b. Partnership assets are sold for $800,000. Determine how the $800,000 is distributed among creditors and partners. ANS: a. Capital balance Standardized capital Equalize Balance Equalize Balance
Maya $ 150,000 500,000 -500,000 (300,000) $ 200,000
Norton $ 210,000 1,400,000 (900,000) 500,000 (300,000) $ 200,000
$ 90,000
$ 135,000 $ 45,000
Conversion:
Cash distribution plan: Distribution 1 2 3 4
Test Bank, Chapter 14
Amount $500,000 135,000 135,000 Remaining
Oswald $ 110,000 200,000 -200,000 -$200,000
Paid To: Creditors Norton Maya and Norton in 2:1 ratio All partners in 30:15:55 ratio ©Cambridge Business Publishers, 2023 14-67
b. $500,000 $135,000 $135,000 $30,000 Total 33.
Creditors $500,000
______ $500,000
Maya
Norton
Oswald
$90,000 9,000 $99,000
$135,000 45,000 4,500 $184,500
$16,500 $16,500
Topic: Partnership liquidation: cash distribution plan and deviations from plan LO 6 The partnership of Clark, Davis, and Evans has a balance sheet as follows: Assets Cash Inventory Equipment Other assets
$ 50,000 100,000 500,000 300,000
Total
_______ $ 950,000
Liabilities Loan payable to Davis Other liabilities Liabilities Capital Capital—Clark Capital—Davis Capital—Evans Total capital Total
$ 100,000 380,000 480,000 140,000 160,000 170,000 470,000 $ 950,000
The partners share income in a 2:2:1 ratio. The partnership is in the process of liquidation. Required a. Prepare a cash distribution plan. b. Assume all cash is to be distributed to the partners as it becomes available. The inventory is sold for $65,000 and the equipment is sold for $449,000. How much cash is distributed to each partner? c. Now assume the distribution in b. is made according to plan. Clark receives other assets with a fair value of $60,000 as a distribution. Then the partnership receives $150,000 from the sale of other assets. How should the $150,000 be distributed among the partners? ANS: a. Capital & loan Standardize Equalize Balance Equalize Balance
Clark $ 140,000 350,000 -350,000 -$ 350,000
Davis $ 260,000 650,000 -650,000 (300,000) $ 350,000
Evans $ 170,000 850,000 (200,000) 650,000 (300,000) $ 350,000
$ 120,000
$ 40,000 60,000
Conversion:
©Cambridge Business Publishers, 2023 14-68
Advanced Accounting, 5th Edition
Cash distribution plan: Distribution Amount 1 $380,000 2 40,000 3 180,000 4 Remaining b.
Paid to Creditors Evans Davis and Evans in a 2:1 ratio Clark, Davis and Evans in a 2:2:1 ratio
Total cash available = $50,000 + $65,000 + $449,000 = $564,000. Creditors are paid $380,000, leaving $184,000 to distribute to partners. The distribution is as follows:
Distribution 2 to Evans Distribution 3 to Davis and Evans in a 2:1 ratio Total c.
Clark
Davis
_____ 0
96,000 $96,000
$
Evans $ 40,000 48,000 $88,000
Since Clark received $60,000 before distribution 3 was completed, Davis and Evans must receive the rest of distribution 3 and Davis and Evans must receive a cash distribution in distribution 4 to bring them even with Clark, before Clark receives additional cash distributions.
Rest of distribution 3 to Davis and Evans Distribution 4 to Davis and Evans in 2:1 ratio Distribution 4 to Clark, Davis, and Evans in a 2:2:1 ratio Total
Clark
Davis $24,000 60,000
Evans $12,000 30,000
9,600 $9,600
9,600 $93,600
4,800 $46,800
Distributions of $84,000 to Davis and $42,000 to Evans allow Clark to participate in distribution 4. 34.
Topic: Partnership liquidation: Cash distribution plan: Deviations from plan LO 6 Partners Stanley, Tuttle and Ulner have decided to liquidate their partnership. The partnership balance sheet is below. Cash Inventory Property, net Goodwill Total
$
25,000 150,000 750,000 200,000 ______ $1,125,000
Liabilities Stanley, capital Tuttle, capital Ulner, capital Total
$350,000 200,000 275,000 300,000 $1,125,000
The partners share income in a 2:4:4 ratio. The goodwill was recognized when Ulner’s admission to the partnership several years ago was recorded using the goodwill method.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-69
Required a. Prepare a cash distribution plan for the partnership. b. Before liquidation begins, Tuttle proposes to take inventory and property with a book value of $300,000 and fair value of $250,000. How much must be received from the sale of remaining assets other than cash before Tuttle shares in additional cash distributions? Stanley and Ulner believe the goodwill has no value, and the remaining inventory and property are likely to be sold for book value. Should the other partners agree to Tuttle’s proposal? ANS: a. Capital Standardize Equalize Balance Equalize Balance Conversion:
Stanley $ 200,000 1,000,000 (250,000) 750,000 (62,500) $ 687,500 $50,000 12,500
Cash distribution plan: Distribution Amount 1 $350,000 2 50,000 3 37,500 4 Remaining b.
Tuttle $ 275,000 687,500 -687,500 -$ 687,500
Ulner $ 300,000 750,000 -750,000 (62,500) $ 687,500
$25,000
Paid to Creditors Stanley Stanley and Ulner in a 1:2 ratio Stanley, Tuttle and Ulner in a 2:4:4 ratio
To even up with Tuttle’s $250,000 distribution, the following distributions must occur: Distribution Stanley Tuttle Ulner 2 $ 50,000 --3 12,500 -25,000 4 125,000 -250,000 Creditors must receive the $25,000 cash balance, plus $325,000 additional cash. Stanley and Ulner must receive a total of $462,500 to even up with Tuttle. Therefore, remaining assets must be sold for $787,500. Since the estimated yield on sale is $600,000, Tuttle’s proposal should be rejected.
©Cambridge Business Publishers, 2023 14-70
Advanced Accounting, 5th Edition
35.
Topic: Comprehensive partnership formation, income allocation, and liquidation LO 2, 3, 6 Carter and Dundee form a partnership on January 1, 2024. Carter contributes $65,000 in cash and equipment worth $135,000, while Dundee contributes equipment worth $245,000; the partnership will assume the $100,000 loan secured by the equipment. Carter receives a 40% interest in the partnership, and Dundee receives a 60% interest. The bonus method is used to record partnership formation. They agree to share partnership income in a 2:3 ratio, after the following allocations: Yearly salary of $45,000 to Carter and $60,000 to Dundee, 10% interest to each on monthly weighted average capital before income allocations, and a bonus to Dundee equal to 20% of partnership income, after salary, interest, and bonus allocations. Income allocations are to be fully implemented. The following events occur during 2024: 1. Carter invests $15,000 in the partnership on June 30 and withdraws $5,000 on September 30. Dundee invests $20,000 in the partnership on September 30. 2. The preclosing trial balance for the partnership at December 31, 2024, before cash withdrawals, is: Account Cash Supplies Equipment, net Liabilities Revenues Expenses Carter, capital Dundee, capital Total
Dr (Cr) $ 105,000 245,000 700,000 (520,000) (390,000) 235,000 (148,000) (227,000) $ 0
3. Carter withdraws $40,000 in cash, and Dundee withdraws $50,000 in cash at year-end. 4. The partners decide to liquidate the partnership in early 2024. Required In your answers below, round amounts to the nearest dollar. a. Prepare the journal entry to record the formation of the partnership on January 1, 2024. b. Prepare a schedule calculating the income allocation to each of the two partners at the end of 2024. c. Prepare a partnership balance sheet at January 1, 2025. d. Prepare a cash distribution plan for liquidation in 2025. e. In January 2025, all supplies are sold for $200,000 and equipment with a book value of $400,000 is sold for $350,000. The partners want to maintain a cash reserve of $25,000. How much cash does each partner receive at the end of January 2025? f. Verify your answer in e. using a safe payment schedule.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2023 14-71
ANS: a. Cash Equipment Loan payable Carter, capital Dundee, capital
65,000 380,000 100,000 138,000 207,000
b. Carter Dundee Salary $45,000 $60,000 Interest (1) 14,425 21,200 Bonus (2) -2,396 Remainder (3) 4,792 7,187 Total $64,217 $90,783 (1) Carter: ($138,000 x 6/12) + ($153,000 x 3/12) + ($148,000 x 3/12) = $144,250 x 10% = $14,425 Dundee: ($207,000 x 9/12) + ($227,000 x 3/12) =$212,000 x 10% = $21,200 (2) B = 20% x ($390,000 - $235,000 - $45,000 - $60,000 - $14,425 - $21,200 – B) B = $2,396 (3) $390,000 - $235,000 - $45,000 - $60,000 - $14,425 - $21,200 – $2,396 = $11,979, divided 2:3 c. Cash Supplies Equipment, net Total (4)
$
15,000 245,000 700,000 $ 960,000
Liabilities Carter, capital (4) Dundee, capital (4) Total
$ 520,000 172,217 267,783 $ 960,000
Schedule of capital balances January 1, 2024 capital Investments Withdrawals Income allocation Year-end withdrawals January 1, 2025 capital
Carter $ 138,000 15,000 (5,000) 64,217 (40,000) $ 172,217
Dundee $ 207,000 20,000 -90,783 (50,000) $ 267,783
Capital Standardize Equalize Balance
Carter $ 172,217 430,543 -$ 430,543
Dundee $ 267,783 446,305 (15,762) $ 430,543
d.
Conversion: -$9,457 Creditors receive $520,000. Next $9,457 to Dundee. Remaining cash to Carter and Dundee in a 2:3 ratio. ©Cambridge Business Publishers, 2023 14-72
Advanced Accounting, 5th Edition
e.
Available cash = $15,000 + $200,000 + $350,000 - $25,000 = $540,000 Creditors receive $520,000 Dundee receives $9,457 + ($10,543 x 60%) = $15,783 Carter receives ($10,543 x 40%) = $4,217
f. Capital balance Loss on supplies ($45,000) Loss on equipment ($50,000) Loss on remaining equipment ($300,000) Cash reserve ($25,000) Total
Test Bank, Chapter 14
Carter $172,217 (18,000) (20,000) (120,000) (10,000) $ 4,217
Dundee $267,783 (27,000) (30,000) (180,000) (15,000) $ 15,783
©Cambridge Business Publishers, 2023 14-73
TEST BANK CHAPTER 15 Bankruptcy and Reorganization MULTIPLE CHOICE 1.
2.
3.
4.
Topic: Legal aspects of bankruptcy LO 1 When a firm is in financial difficulty, which of the following occurs outside the judicial system? a. b. c. d.
Chapter 9 liquidation Chapter 11 reorganization Quasi-reorganization Chapter 7 bankruptcy
ANS:
c
Topic: Legal aspects of bankruptcy LO 1 Which statement is true concerning a Chapter 7 liquidation? a. b. c. d.
Chapter 7 is applicable to businesses but not individuals. Proceedings from the sale of assets are distributed to creditors on a pro rata basis. A company may be allowed to remain in possession of its assets during liquidation. Obligations to employees are not discharged once Chapter 7 proceedings are complete.
ANS:
b
Topic: Legal aspects of bankruptcy LO 1 In a Chapter 7 liquidation, when a firm’s debts are discharged, it means that: a. b. c. d.
The debts are in the process of being evaluated by the courts. The debts have priority and are paid ahead of other debts. The debts are cancelled, with the creditors having no further claim. The debts are subject to partial payment, depending on liquidation assets.
ANS:
c
Topic: Legal aspects of bankruptcy LO 1 When a Chapter 7 liquidation is completed, which of a company’s debts, outstanding prior to a declaration of bankruptcy, remain? a. b. c. d.
Compensation owed to employees. Local taxes owed to municipalities. Amounts owed to suppliers for goods delivered. None remain.
ANS:
b
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-1
5.
Topic: Legal aspects of bankruptcy LO 1 Creditors often prefer reorganization to liquidation because: a.
c. d.
The firm’s ability to pay its debts may be higher when it is allowed to continue operations. The courts take control of the firm’s assets, preventing the firm from selling them off without paying creditors. More debts are required to be paid. The creditors are in control of the liquidation and payment process.
ANS:
a
b.
6.
7.
8.
Topic: Legal aspects of bankruptcy LO 1 Chapter 9 bankruptcies apply to: a. b. c. d.
Corporations. Individuals. Government municipalities. Not-for-profit organizations.
ANS:
c
Topic: Legal aspects of bankruptcy LO 1 Which proceeding applies the concept of reorganization to individuals? a. b. c. d.
Chapter 7 Chapter 9 Chapter 11 Chapter 13
ANS:
d
Topic: Legal aspects of bankruptcy LO 1 Which statement is true concerning a Chapter 11 reorganization? a. b.
d.
A Chapter 11 reorganization is available to businesses but not individuals. The plan of reorganization must include nomination of a trustee to take control of assets until the reorganization is complete. The plan of reorganization must be approved by creditors representing two-thirds of dollar claims. Creditors’ claims must be settled on a pro rata basis.
ANS:
c
c.
©Cambridge Business Publishers, 2023 15-2
Advanced Accounting, 5th Edition
9.
10.
11.
12.
Topic: Legal aspects of bankruptcy LO 1 In a Chapter 11 reorganization, if the plan of reorganization allows the firm to remain in control of its assets, the firm is called a a. b. c. d.
Discharged organization. Debtor-in-possession. Voluntary reorganization. Bankrupt-organization-in-process.
ANS:
b
Topic: Legal aspects of bankruptcy LO 1 Chapter 11 reorganization includes all of the following provisions except: a. b. c. d.
All creditors must approve the plan of reorganization. The reorganization plan must be approved by the bankruptcy court. A trustee is not required to be appointed to oversee reorganization activities. A plan of reorganization includes a restructuring of both financial support and operating methods.
ANS:
a
Topic: Liquidation basis of accounting LO 2 Using the liquidation basis of accounting, expenses for delivering pre-liquidation customer orders during the liquidation period are a. b. c. d.
not reported until paid. reported at discounted expected value. accrued at the expected amount owed. reported as both an asset and liability, at the full amount owed.
ANS:
c
Topic: Liquidation basis of accounting LO 2 Which statement is false concerning the liquidation basis of accounting? a. b. c. d.
Liabilities are reported at full book value, unless terms have been legally renegotiated. Expected liquidation costs are netted against asset fair values. Expected compensation to be paid is accrued as a liability, even if it has not yet been earned. Previously unreported identifiable intangible assets are reported at fair value.
ANS:
b
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-3
13.
14.
15.
16.
Topic: Liquidation basis of accounting LO 2 A company entering liquidation has reported assets with a book value of $800,000 and a liquidation value of $625,000. It also has previously unreported identifiable intangible assets with a fair value of $40,000. Estimated liquidation costs are $50,000. The company’s statement of net assets in liquidation reports total assets of: a. b. c. d.
$665,000 $800,000 $675,000 $625,000
ANS:
a $625,000 + $40,000 = $665,000
Topic: Liquidation basis of accounting LO 2 A company entering liquidation has reported assets with a book value of $800,000 and a liquidation value of $625,000, and previously unreported identifiable intangible assets with a fair value of $40,000. During the next month, it sells assets for $200,000. Remaining assets have a fair value of $450,000. The company’s statement of changes in net assets in liquidation for the month reports a remeasurement gain or loss on assets of: a. b. c. d.
$175,000 loss $25,000 gain $15,000 loss $65,000 gain
ANS:
c $450,000 – ($665,000 - $200,000) = $15,000 loss
Topic: Liquidation basis of accounting LO 2 Following GAAP, the liquidation basis of accounting is appropriate a. b. c. d.
If the liquidation value of the company’s assets is less than the company’s liabilities. If liquidation values are documented. When it is extremely likely that liquidation will occur. When a company declares bankruptcy.
ANS:
c
Topic: Liquidation basis of accounting LO 2 Following the liquidation basis of accounting, the total income effect of liquidation is reported a. b. c. d.
As liquidation occurs. At its estimated value, at the start of the liquidation process. At the end of the liquidation process. When obligations are paid.
©Cambridge Business Publishers, 2023 15-4
Advanced Accounting, 5th Edition
ANS: 17.
18.
19.
b
Topic: Liquidation basis of accounting LO 2 Following the liquidation basis of accounting, revenue on customer orders, expected to be earned during the liquidation period, is a. b. c. d.
Accrued in full at its estimated amount at the start of the liquidation process. Accrued as it is earned. Reported when paid. Not reported.
ANS:
a
Topic: Liquidation basis of accounting LO 2 The focus of the liquidation basis of accounting is to a. b. c. d.
Measure cash flows arising from the liquidation of assets and their use to pay liabilities. Report liquidation gains and losses by comparing book values with liquidation values. Anticipate the results of liquidation. Report liquidation transactions accurately as they occur.
ANS:
c
Topic: Liquidation basis of accounting LO 2 Using the liquidation basis of accounting, previously unreported identifiable intangible assets are reported a. b. c. d.
If they are contractual or separable. If they are sold for cash. If proceeds from their sale can be used to pay liabilities. Never.
ANS:
c
Use the following information for Questions 20 – 26. On May 1, Rolly Industries begins liquidation activities and adopts the liquidation basis of accounting. The book value of its reported assets total $700,000, including $15,000 in cash, and the book value of its liabilities, consisting of bank loans, total $600,000. Expected proceeds from reported assets other than cash are: • • •
Receivables, $65,000 Inventories, $150,000 Plant and equipment, $250,000
Expected costs of liquidating assets are $25,000.
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-5
20.
Topic: Liquidation basis of accounting LO 2 The May 1 statement of net assets in liquidation reports total assets in the amount of:
21.
a. b. c. d.
$465,000. $700,000. $715,000. $480,000.
ANS:
d $15,000 + $65,000 + $150,000 + $250,000 = $480,000
Topic: Liquidation basis of accounting LO 2 The May 1 statement of net assets in liquidation reports net assets in the amount of: a. b. c. d.
$100,000. $(145,000). $(120,000). $(160,000).
ANS:
b $480,000 – ($600,000 + $25,000) = $(145,000)
Use the following additional information to answer Questions 22 – 26. During the two months ending June 30, the following transactions occur: • • • • • •
• 22.
Receivables of $52,000 are collected and the rest are determined to be uncollectible. Inventories are sold for $120,000. Plant and equipment is sold for $128,000. Liquidation costs of $10,000 are paid. Bank loans of $300,000 are paid, and creditors holding the remaining loans agree to accept $250,000 as full payment. Fair values of remaining assets other than cash are: • Inventories, $60,000 • Plant and equipment, $175,000 Estimated future liquidation costs are $8,000. Topic: Liquidation basis of accounting LO 2 On the statement of changes in net assets in liquidation for the two months ending June 30, the remeasurement gain or loss on accrued liquidation costs is: a. b. c. d.
$2,000 gain $2,000 loss $7,000 gain $7,000 loss
ANS:
c
©Cambridge Business Publishers, 2023 15-6
Advanced Accounting, 5th Edition
23.
24.
Topic: Liquidation basis of accounting LO 2 On the statement of changes in net assets in liquidation for the two months ending June 30, the remeasurement gain or loss on bank loans is: a. b. c. d.
$300,000 loss $25,000 gain $25,000 loss $50,000 gain
ANS:
d
Topic: Liquidation basis of accounting LO 2 On the statement of changes in net assets in liquidation for the two months ending June 30, the remeasurement gain or loss on plant and equipment is: a. b. c. d.
$53,000 gain $122,000 loss $25,000 loss $203,000 gain
ANS:
a
Notes for Questions 22 – 24: Statement of changes in net assets in liquidation for the two months ending June 30 Net assets, May 1 $480,000 - $625,000 $(145,000) Remeasurement adjustments: Receivables $0 – ($65,000 - $52,000) (13,000) Inventories $60,000 – ($150,000 - $120,000) 30,000 Plant and equipment $175,000 – ($250,000 - $128,000) 53,000 Accrued liquidation costs $8,000 – ($25,000 - $10,000) 7,000 Bank loans $300,000 - $250,000 50,000 Net assets, June 30 $ (18,000) 25.
Topic: Liquidation basis of accounting LO 2 On the statement of net assets in liquidation at June 30, total assets are: a. b. c. d.
$235,000 $240,000 $227,000 $222,000
ANS:
b
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-7
26.
Topic: Liquidation basis of accounting LO 2 On the statement of net assets in liquidation at June 30, total liabilities are: a. b. c. d.
$258,000 $250,000 $260,000 $252,000
ANS:
a
Notes for Questions 25 and 26:
Cash Inventories Plant and equipment Total 27.
28.
Statement of net assets in liquidation, June 30 $ 5,000 Bank loans 60,000 Accrued liquidation costs 175,000 Net assets $240,000 Total
$250,000 8,000 (18,000) $240,000
Topic: Liquidation basis of accounting LO 2 A company is liquidating and has been following the liquidation basis of accounting. For the current reporting period, the beginning equipment balance is $80,000. During the next 3 months, equipment that had a liquidation value of $22,000 is sold for $15,000. Remaining equipment at the end of the period has a liquidation value of $75,000. On the company’s operating statement, what is the change in net assets for the equipment? a. b. c. d.
$10,000 gain $7,000 loss $12,000 loss $82,000 loss
ANS:
a $15,000 + $75,000 - $80,000 = $10,000 gain
Topic: Liquidation basis of accounting LO 2 A company with assets reported at $350,000 and liabilities reported at $380,000 begins the process of liquidation and begins using the liquidation basis of accounting. Its reported assets have a liquidation value of $300,000. The company also has previously unreported identifiable assets with a liquidation value of $15,000. Negotiations with creditors have been favorable and although no conclusion has been reached, the company expects to be able to pay off its reported liabilities at $0.75 for each dollar of debt. Liquidation costs are expected to be $22,000. What is the net asset balance for the company as it enters liquidation? a. b. c. d.
$(30,000) $($65,000) $8,000 $(87,000)
©Cambridge Business Publishers, 2023 15-8
Advanced Accounting, 5th Edition
ANS: 29.
Topic: Chapter 7 bankruptcy LO 3 Which one of the following is a fully secured liability in a Chapter 7 bankruptcy? a. b. c. d. ANS:
30.
d. ANS:
32.
$250,000 in administrative costs owed to the trustee. $100,000 in customer deposits. A $200,000 loan secured by equipment with a book value of $225,000 and a fair value of $175,000. A $150,000 loan secured by equipment with a book value of $200,000 and a fair value of $165,000. d
Topic: Chapter 7 bankruptcy LO 3 Which one of the following is a partially secured liability in a Chapter 7 bankruptcy? a. b. c.
31.
d $300,000 + $15,000 - $380,000 - $22,000 = $(87,000)
$250,000 in administrative costs owed to the trustee. $100,000 in customer deposits. A $200,000 loan secured by equipment with a book value of $225,000 and a fair value of $175,000. A $150,000 loan secured by equipment with a book value of $200,000 and a fair value of $165,000. c
Topic: Chapter 7 bankruptcy LO 3 Which one of the following is not an unsecured liability with priority in a Chapter 7 bankruptcy? a. b. c. d.
$100,000 in customer deposits. $80,000 in income taxes. $10,000 of a $50,000 loan secured by property with a fair value of $40,000. $20,000 in compensation owed to employees for work performed a month prior to the bankruptcy filing.
ANS:
c
Topic: Chapter 7 bankruptcy LO 3 Which one of the following is an unsecured liability with priority in a Chapter 7 bankruptcy? a. b. c. d.
$20,000 of a $100,000 loan secured with property having a fair value of $80,000. Amounts due to pension plans for services rendered 9 months ago. Compensation owed to employees for services rendered 7 months ago. Trustee administrative expenses.
ANS:
d
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-9
33.
Topic: Statement of affairs LO 3 A company has the following balance sheet: Equipment
$800,000
Total
_______ $800,000
Loans payable Mortgage payable Shareholders’ equity Total
$400,000 350,000 50,000 $800,000
The equipment has a realizable value of $450,000, and is pledged as security for the mortgage. The estimated deficiency to unsecured creditors is: a. b. c. d.
$ 50,000 $400,000 $300,000 $200,000
ANS:
c Unsecured liabilities Free assets
$400,000 $ 450,000 (350,000)
Deficiency
(100,000) $300,000
Use the following information to answer Questions 34 and 35 below. A company has the following balance sheet: Inventory Equipment, net Total
$ 60,000 150,000 _______ $210,000
Accounts payable Loan payable Shareholders’ equity Total
$ 85,000 130,000 (5,000) $210,000
The inventory has a realizable value of $40,000, and the equipment has a realizable value of $115,000. The equipment secures the loan payable and the accounts payable are unsecured. 34.
Topic: Statement of affairs LO 3 The estimated deficiency to unsecured creditors is: a. b. c. d.
$115,000 $ 25,000 $130,000 $ 60,000
ANS:
d Total unsecured liabilities = $85,000 + ($130,000 - $115,000) = $100,000 Free assets = inventory, $40,000 Estimated deficiency = $100,000 - $40,000 = $60,000
©Cambridge Business Publishers, 2023 15-10
Advanced Accounting, 5th Edition
35.
Topic: Statement of affairs LO 3 Expected payment on the loan payable is: a. b. c. d.
$130,000 $121,000 $127,000 $115,000
ANS:
b $115,000 + ($15,000 x ($40/$100)) = $121,000
Use the following information to answer Questions 36 and 37 below. A statement of affairs shows $30,000 of assets pledged to partially secured creditors, liabilities of $65,000 to partially secured creditors, liabilities of $25,000 to unsecured creditors with priority, and liabilities of $90,000 to other unsecured creditors. 36.
Topic: Statement of affairs LO 3 What are total unsecured liabilities, as reported on the statement of affairs? a. b. c. d.
$ 90,000 $100,000 $125,000 $155,000
ANS:
c Partially secured creditors Less: Value of pledged assets
$65,000 (30,000)
Unsecured creditors with priority
25,000
Unsecured creditors Total unsecured liabilities 37.
$ 35,000
90,000 $125,000
Topic: Statement of affairs LO 3 If the estimated deficiency to unsecured creditors is $40,000, what is the amount of total free assets, as reported on the statement of affairs? a. b. c. d.
$ 50,000 $ 75,000 $ 85,000 $110,000
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-11
ANS:
d Total free assets Less: Unsecured liabilities with priority Net free assets Estimated deficiency to unsecured creditors Total unsecured liabilities
38.
$110,000 (25,000) 85,000 40,000 $125,000
Topic: Statement of affairs LO 3 A company owes a bank loan of $280,000. The loan is secured by the company's inventory, which has a book value of $300,000 and an estimated realizable value of $250,000. On a statement of affairs, the liability to the bank would be classified as: a. b. c. d.
$250,000 secured and $30,000 unsecured $250,000 secured and $20,000 unsecured $250,000 secured and $30,000 unsecured with priority $280,000 fully secured
ANS:
a
Use the following information to answer Questions 39 and 40 below. A statement of affairs shows $65,000 of assets pledged to fully secured creditors, $85,000 of assets pledged to partially secured creditors, $65,000 of assets not held as security for any liabilities, liabilities of $50,000 to fully secured creditors, $120,000 to partially secured creditors, $25,000 to unsecured creditors with priority, and $140,000 to other unsecured creditors. 39.
Topic: Statement of affairs LO 3 Total unsecured liabilities, are reported on the statement of affairs in the amount of: a. b. c. d.
$140,000. $150,000. $155,000. $175,000.
ANS:
d Partially secured creditors Less: Value of pledged assets Unsecured creditors Total unsecured liabilities
©Cambridge Business Publishers, 2023 15-12
$ 120,000 (85,000)
$ 35,000 140,000 $175,000
Advanced Accounting, 5th Edition
40.
Topic: Statement of affairs LO 3 What is the estimated deficiency to unsecured creditors, as reported on the statement of affairs? a. b. c. d.
$145,000 $165,000 $120,000 $110,000
ANS:
c Assets pledged to fully secured creditors Less: Fully secured liabilities Free assets Total free assets Less: Unsecured liabilities with priority Net free assets Estimated deficiency to unsecured creditors Total unsecured liabilities
41.
$ 65,000 (50,000)
$ 15,000 65,000 80,000 (25,000) 55,000 120,000 $175,000
Topic: Statement of affairs LO 3 Which one of the following reported assets of a corporation is most likely to realize the smallest percentage of its book value in bankruptcy? a. b. c. d.
Accounts receivable Plant & equipment Goodwill Inventories
ANS:
c
Use the following information to answer Questions 42 – 45 below. A company’s statement of affairs reports the following: • • • • • • •
Assets pledged to fully secured creditors, $500,000. Assets pledged to partially secured creditors, $250,000. Fully secured liabilities, $325,000 Partially secured liabilities, $400,000. Free assets, $81,000. Unsecured liabilities with priority, $40,000. Unsecured liabilities, $210,000.
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-13
42.
43.
44.
45.
Topic: Statement of affairs LO 3 What is the estimated deficiency to unsecured creditors, as reported on the statement of affairs? a. b. c. d.
$144,000 $184,000 $104,000 $200,000
ANS:
a
Topic: Statement of affairs LO 3 How much can unsecured creditors with priority expect to be paid per dollar of debt? a. b. c. d.
$0.60 $1.00 $0.85 $0.375
ANS:
b
Topic: Statement of affairs LO 3 How much can unsecured creditors expect to be paid per dollar of debt? a. b. c. d.
$0.60 $1.00 $0.85 $0.375
ANS:
a $216,000/$360,000 = $0.60
Topic: Statement of affairs LO 3 How much can partially secured creditors expect to be paid per dollar of debt? a. b. c. d.
$0.60 $1.00 $0.85 $0.375
ANS:
c [$250,000 + ($150,000 x 0.60)]/$400,000 = $0.85
©Cambridge Business Publishers, 2023 15-14
Advanced Accounting, 5th Edition
Notes to Questions 42 – 45: Free assets Assets pledged to fully secured creditors Less: Fully secured liabilities Assets pledged to partially secured creditors Free assets Total free assets Less: Unsecured liabilities with priority Net free assets Estimated deficiency to unsecured creditors Total unsecured liabilities
$ 500,000 (325,000)
$175,000
250,000 81,000 256,000 (40,000) 216,000 144,000 $360,000 Unsecured liabilities
Fully secured liabilities
$ 325,000
Partially secured liabilities Less: Partially secured assets
400,000 (250,000)
Unsecured liabilities with priority Unsecured liabilities Total unsecured liabilities 46.
150,000
40,000 210,000 $360,000
Topic: Statement of affairs LO 3 A bankrupt firm has a loan payable of $200,000, secured by property with a realizable value of $175,000. The expected recovery percentage for the firm’s unsecured creditors is 60%. What is the expected recovery percentage on the loan? a. b. c. d.
60% 75% 85% 95%
ANS:
d $175,000 + ($25,000 x 60%) = $190,000/$200,000 = 95%
Use the following information for Questions 47 – 50: Gaveup Company is entering bankruptcy under Chapter 7 of the bankruptcy laws. The following information is available: Realizable value of assets pledged to fully-secured creditors $500,000 Realizable value of assets pledged to partially-secured creditors 400,000 Realizable value of unsecured assets 259,000 Liabilities, fully secured 420,000 Liabilities, partially secured 600,000 Liabilities, unsecured with priority 35,000 Liabilities, unsecured 600,000 Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-15
47.
48.
49.
50.
Topic: Statement of affairs LO 3 Gaveup’s statement of affairs reports net free assets of: a. b. c. d.
$249,000 $304,000 $329,000 $229,000
ANS:
b
Topic: Statement of affairs LO 3 Gaveup’s statement of affairs reports total unsecured liabilities, excluding those with priority, of: a. b. c. d.
$ 800,000 $ 200,000 $ 500,000 $1,350,000
ANS:
a
Topic: Statement of affairs LO 3 Gaveup’s statement of affairs reports an estimated deficiency to unsecured creditors of: a. b. c. d.
$304,000 $350,000 $496,000 $420,000
ANS:
c
Topic: Statement of affairs LO 3 The expected recovery percentage for Gaveup’s unsecured creditors without priority (rounded to nearest whole percentage if necessary) is: a. b. c. d.
35% 42% 34% 38%
ANS:
d
©Cambridge Business Publishers, 2023 15-16
Advanced Accounting, 5th Edition
Notes for Questions 47 – 50: Unsecured liabilities Fully secured creditors Partially secured creditors Less: value of pledged assets Unsecured creditors with priority
$420,000 600,000 (400,000)
$200,000
35,000
Unsecured creditors Total unsecured liabilities
600,000 $800,000 Free assets
Assets pledged to fully secured creditors Less: amount of fully secured liabilities Assets pledged to partially secured creditors Unsecured assets Total free assets Less: unsecured liabilities with priority Net free assets Estimated deficiency to unsecured creditors Total unsecured liabilities
$ 500,000 (420,000) 400,000
$ 80,000 259,000 339,000 (35,000) 304,000 496,000 $800,000
The expected recovery percentage for unsecured creditors is 38% = $304,000/$800,000. 51.
Topic: Statement of realization and liquidation LO 3 Assets carried at $200,000 were reported by a bankrupt company at the beginning of a period. During the period, assets carried at $60,000 were sold for $40,000, and other assets carried at $15,000 were determined to be worthless. A statement of realization and liquidation reports "assets not realized" of: a. b. c. d.
$125,000 $140,000 $40,000 $160,000
ANS:
a $200,000 - $60,000 - $15,000 = $125,000
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-17
52.
53.
54.
Topic: Statement of realization and liquidation LO 3 Liabilities of $175,000 existed at the beginning of a period. During the period, liabilities recorded at $60,000 were settled for $40,000, and new liabilities of $5,000 were incurred. A statement of realization and liquidation reports "liabilities not liquidated" of: a. b. c. d.
$115,000 $140,000 $120,000 $125,000
ANS:
c $175,000 - $60,000 + $5,000 = $120,000
Topic: Statement of realization and liquidation LO 3 Liabilities of $200,000 were settled in full for $125,000. The $75,000 difference is reported on the statement of realization and liquidation as: a. b. c. d.
Liabilities to be liquidated Liabilities not liquidated A gain on liability liquidation A loss on liability liquidation
ANS:
c
Topic: Statement of realization and liquidation LO 3 A statement of realization shows assets to be realized of $400,000, assets not realized of $250,000, and a loss on realization of $50,000. The amount reported for assets realized is: a. b. c. d.
$200,000 $100,000 $250,000 $300,000
ANS:
b Book value of assets sold = $400,000 - $250,000 = $150,000. If the loss on realization is $50,000, the amount realized = $150,000 - $50,000 = $100,000.
©Cambridge Business Publishers, 2023 15-18
Advanced Accounting, 5th Edition
Use the following information to answer Questions 55 – 61: A company enters Chapter 7 bankruptcy proceedings. Its balance sheet, prepared using GAAP for a company with continuing operations, is as follows: Cash Inventories Plant and equipment, net Total
$ 15,000 100,000 250,000 $365,000
Accounts payable Loans payable Estate equity (deficit) Total
$ 90,000 300,000 (25,000) $365,000
The plant and equipment is security for one of the loans, with a balance of $130,000. The other liabilities are unsecured. The following transactions occur: • • • • 55.
56.
57.
Inventories with a book value of $60,000 were sold for $40,000. The plant and equipment was sold for $200,000. The loan secured by the plant and equipment was paid. Wages and administrative expenses of $10,000 were accrued. An initial payment of 40 cents per dollar of indebtedness was paid to the unsecured creditors.
Topic: Statement of realization and liquidation LO 3 The statement of realization and liquidation reports total “assets to be realized” of: a. b. c. d.
$260,000 $365,000 $240,000 $350,000
ANS:
d
Topic: Statement of realization and liquidation LO 3 The statement of realization and liquidation reports total “assets not realized” of: a. b. c. d.
$ 61,000 $ 40,000 $ 60,000 $150,000
ANS:
b
Topic: Statement of realization and liquidation LO 3 The statement of realization and liquidation reports “liabilities not liquidated” of: a. b. c. d.
$166,000 $156,000 $234,000 $224,000
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-19
ANS: 58.
59.
60.
61.
a
Topic: Statement of realization and liquidation LO 3 The statement of realization and liquidation reports “liabilities to be liquidated” of: a. b. c. d.
$166,000 $400,000 $390,000 $260,000
ANS:
c
Topic: Statement of realization and liquidation LO 3 The statement of realization and liquidation reports “loss on realization of assets” of: a. b. c. d.
$50,000 $80,000 $70,000 $30,000
ANS:
c
Topic: Trustee’s balance sheet LO 3 On the trustee’s balance sheet at the end of the period, total assets are: a. b. c. d.
$ 40,000 $ 61,000 $111,000 $ 90,000
ANS:
b
Topic: Trustee’s statement of estate equity LO 3 On the trustee’s statement of estate equity, the change in estate equity is: a. b. c. d.
$(70,000) $(10,000) $(60,000) $(80,000)
ANS:
d
©Cambridge Business Publishers, 2023 15-20
Advanced Accounting, 5th Edition
Notes for Questions 55 – 61: Statement of Realization and Liquidation Assets to be realized: Inventories Plant and equipment Liabilities to be liquidated: Accounts payable Loan payable Liabilities incurred: Accrued expenses
$100,000 250,000
90,000 300,000
Assets realized: Inventories $350,000 Plant and equipment
$ 40,000 200,000
Assets not realized: Inventories
40,000
390,000 Liabilities liquidated: Accounts payable 10,000 Loans payable (1) Liabilities not liquidated: Accounts payable Loan payable Accrued expenses
234,000
54,000 102,000 10,000
166,000
$130,000 + (40% x ($300,000 - $130,000)) = $198,000 ($250,000 - $200,000) + ($60,000 - $40,000) = $70,000
Balance Sheet $ 21,000 Accounts payable 40,000 Accrued expenses Loans payable ______ Estate equity $ 61,000 Total liabilities and equity
Cash Inventories
Total assets
Statement of Estate Equity Losses on realization of assets Accrued wages and administrative expenses Net change in estate deficit Estate equity, beginning balance Estate equity, ending balance 62.
36,000 198,000
______ Losses on realization of assets (2) $750,000 Total
Total (1) (2)
$ 54,000 10,000 102,000 (105,000) $ 61,000 $ (70,000) (10,000) (80,000) (25,000) $(105,000)
Topic: Reorganization LO 4 Which one of the following is not a liability subject to compromise in a reorganization? a. b. c. d. ANS:
A liability for supplies purchased after the Chapter 11 filing. A liability incurred after the Chapter 11 filing for premature termination of a lease existing prior to filing. Notes payable existing prior to the Chapter 11 filing. A bank loan of $500,000 existing prior to the Chapter 11 filing, and secured by property valued at $350,000. a
Test Bank, Chapter 15
$240,000
©Cambridge Business Publishers, 2023 15-21
70,000 $750,000
63.
Topic: Financial reporting during reorganization LO 4 During reorganization, a company should report liabilities subject to compromise on the balance sheet: a. b. c. d. ANS:
64.
65.
a
Topic: Financial reporting during reorganization LO 4 During reorganization, prepetition liabilities that are fully secured are reported: a. b. c. d.
At book value, without current/noncurrent classification At expected settlement amounts, without current/noncurrent classification At book value, in current and noncurrent classifications As offsets to the assets that secure the liabilities
ANS:
c
Topic: Financial reporting during reorganization LO 4 A firm is undergoing reorganization. Reorganization items on the income statement are likely to include all the following except: a.
66.
Under a separate caption, at book value, without current/noncurrent classification Under a separate caption, at expected settlement amounts, without current/noncurrent classification Under a separate caption, at book value, in current and noncurrent classifications Under a separate caption, at expected settlement amounts, in current and noncurrent classifications
b. c. d.
Gains and losses resulting from adjusting existing book values of liabilities to the amounts likely to be allowed. Gains on settlement of prepetition liabilities. Interest income on investment of excess cash. Penalties from cancelation of purchase contracts.
ANS:
b
Topic: Reorganization value LO 4 In emerging from reorganization under Chapter 11 of the bankruptcy laws, a company is expected to have total future cash flows from its restructured operations of $5,000,000 (discounted present value = $3,500,000). In addition, excess assets, not needed for future operations, have a carrying value of $300,000 and are expected to be sold for $200,000. The company’s reorganization value is: a. b. c. d.
$5,200,000 $5,250,000 $3,500,000 $3,700,000
©Cambridge Business Publishers, 2023 15-22
Advanced Accounting, 5th Edition
ANS: 67.
68.
69.
70.
d $3,500,000 + $200,000 = $3,700,000
Topic: Reorganization value LO 4 In a Chapter 11 reorganization, reorganization value is: a. b. c. d.
Book value of assets to remain plus fair value of assets to be sold Fair value of assets to remain and fair value of assets to be sold Fair value of assets to remain Fair value of assets to be sold
ANS:
b
Topic: Reorganization value LO 4 A company is emerging from reorganization under Chapter 11 of the bankruptcy laws. It has allowed prepetition liabilities of $3,500,000, postpetition liabilities of $500,000, and new equity interests valued at $150,000. For fresh start reporting to apply, the reorganization value of the company’s assets must be: a. b. c. d.
Less than $3,500,000 Less than $4,000,000 Between $3,500,000 and $4,150,000 More than $4,000,000
ANS:
b Reorganization value must be less than the sum of the prepetition and postpetition liabilities; $3,500,000 + $500,000 = $4,000,000.
Topic: Fresh start reporting LO 4 In emerging from reorganization under Chapter 11 of the bankruptcy laws, a company issues new voting shares to creditors and prior shareholders. To qualify for fresh start reporting: a. b. c. d.
Creditors must receive at least 75% of the new shares Creditors must receive at least 90% of the new shares Existing shareholders must receive less than 25% of the new shares Existing shareholders must receive less than 50% of the new shares
ANS:
d
Topic: Fresh start reporting LO 4 A company emerges from reorganization with $4,600,000 reorganization value, postpetition liabilities of $500,000, and new debt financing totaling $3,900,000. Its new equity is valued at a. b. c.
$0 $700,000 $200,000
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-23
d.
$100,000
ANS:
c $4,600,000 - $3,900,000 - $500,000 = $200,000
Use the following information to answer Questions 71 - 73: A company emerging from Chapter 11 reorganization has the following balance sheet: Current assets Noncurrent assets
$
150,000 900,000
_______ $1,050,000
Total
Postpetition liabilities Liabilities subject to compromise Common stock Retained deficit Total
$ 100,000 1,000,000 200,000 (250,000) $1,050,000
The plan of reorganization provides for the following: • • • • 71.
72.
Estimated reorganization value is $750,000. Liabilities subject to compromise are replaced with $500,000 in notes payable and 60% of the new common stock issue. Existing shareholders receive 40% of the new stock issue. Noncurrent assets are written down by $300,000.
Topic: Reorganization and fresh start reporting LO 4 The entry to record settlement of liabilities subject to compromise includes a credit to new common stock of: a. b. c. d.
$90,000 $150,000 $60,000 $0
ANS:
a
Topic: Reorganization and fresh start reporting LO 4 The entry to record settlement of liabilities subject to compromise results in a gain on discharge of debt of: a. b. c. d.
$500,000 $490,000 $410,000 $390,000
ANS:
c
©Cambridge Business Publishers, 2023 15-24
Advanced Accounting, 5th Edition
73.
Topic: Reorganization and fresh start reporting LO 4 The entry to record restructuring of the interests of prior shareholders results in a credit to additional paid-in capital of: a. b. c. d.
$110,000 $100,000 $200,000 $140,000
ANS:
d
Notes for Questions 71 - 73: New common stock = $750,000 - $100,000 - $500,000 = $150,000 Journal entries are: Liabilities subject to compromise
1,000,000 Notes payable Common stock (new) Gain on discharge of debt
500,000 90,000 410,000
Common stock (old)
200,000 Common stock (new) Additional paid-in capital
60,000 140,000
Loss on asset revaluation
300,000 Noncurrent assets
300,000
Gain on discharge of debt Additional paid-in capital
410,000 140,000 Loss on asset revaluation Retained earnings
300,000 250,000
After the above entries, the balance sheet is as follows: Current assets $150,000 Postpetition liabilities Noncurrent assets 600,000 Notes payable ______ Common stock Total $750,000 Total
$100,000 500,000 150,000 $750,000
Use the following information to answer Questions 74 – 78: A company emerging from Chapter 11 reorganization has the following balance sheet: Cash Accounts receivable Inventories Plant and equipment, net Total Test Bank, Chapter 15
$
25,000 60,000 400,000 1,200,000 $1,685,000
Postpetition liabilities Liabilities subject to compromise Common stock Retained deficit Total
$ 200,000 1,500,000 300,000 (315,000) $1,685,000
©Cambridge Business Publishers, 2023 15-25
The plan of reorganization provides for the following: • • • • • 74.
75.
76.
Estimated reorganization value is $1,250,000. Liabilities subject to compromise are replaced with $800,000 in notes payable and 70% of the new common stock issue. Existing shareholders receive 30% of the new stock issue Inventories and plant and equipment are written down to their fair values of $325,000 and $700,000, respectively. There are no previously unreported identifiable intangible assets.
Topic: Reorganization and fresh start reporting LO 4 On the balance sheet immediately following emergence from reorganization, the common stock balance is: a. b. c. d.
$450,000 $100,000 $250,000 $200,000
ANS:
c $1,250,000 - $200,000 - $800,000 = $250,000
Topic: Reorganization and fresh start reporting LO 4 On the balance sheet immediately following emergence from reorganization, goodwill is: a. b. c. d.
$0 $115,000 $125,000 $140,000
ANS:
d $1,250,000 - $25,000 - $60,000 - $325,000 - $700,000 = $140,000
Topic: Reorganization and fresh start reporting LO 4 The entry to record settlement of liabilities subject to compromise results in a gain on discharge of debt of: a. b. c. d.
$525,000 $600,000 $700,000 $625,000
ANS:
a
©Cambridge Business Publishers, 2023 15-26
Advanced Accounting, 5th Edition
77.
78.
Topic: Reorganization and fresh start reporting LO 4 The entry to record restructuring of the interests of prior shareholders results in a credit to additional paid-in capital of: a. b. c. d.
$ 50,000 $225,000 $175,000 $ 75,000
ANS:
b
Topic: Reorganization and fresh start reporting LO 4 In the entry to record revaluation of assets, the loss on asset revaluation is: a. b. c. d.
$575,000 $460,000 $450,000 $435,000
ANS:
d
Notes for Questions 74 – 78: Journal entries are: Liabilities subject to compromise
1,500,000 Notes payable Common stock (new) Gain on discharge of debt
Common stock (old)
800,000 175,000 525,000 300,000
Common stock (new) Additional paid-in capital Loss on asset revaluation Goodwill
75,000 225,000 435,000 140,000
Inventories Plant and equipment Gain on discharge of debt Additional paid-in capital
525,000 225,000 Loss on asset revaluation Retained earnings
Test Bank, Chapter 15
75,000 500,000
435,000 315,000
©Cambridge Business Publishers, 2023 15-27
After the above entries, the balance sheet is as follows: Cash $ 25,000 Postpetition liabilities Accounts receivable 60,000 Notes payable Inventories 325,000 Common stock Plant and equipment 700,000 Goodwill 140,000 Total $1,250,000 Total 79.
$ 200,000 800,000 250,000 _______ $1,250,000
Topic: Quasi-reorganization LO 5 A company has 1,000 outstanding common shares with a $5/share par value, additional paid-in capital of $4,000, and a deficit of $6,500 in retained earnings. It reduces its assets by $2,000 to report them at fair value. To achieve a successful quasi-reorganization, the company must reduce the par value of its common shares by: a. b. c. d.
$0.50 per share $4.50 per share $4.00 per share $3.50 per share
ANS:
b The deficit increases to $8,500 after the asset write-off. Since additional paid-in capital is $4,000, the common stock account must be reduced by $4,500 to absorb the deficit. There are 1,000 shares, so par must be reduced by $4,500/1,000 = $4.50/share.
Use the following information for Questions 80 – 83: Hopeful Company’s balance sheet is as follows:
Assets Cash Inventories Property (net) Total
Hopeful Company Balance Sheet, pre-quasi-reorganization Liabilities and Equity $ 60,000 Loans payable 550,000 Common stock, $2 par 950,000 Additional paid-in capital ________ Retained earnings $1,560,000 Total
$1,220,000 400,000 600,000 (660,000) $1,560,000
The company enters into a quasi-reorganization. Pursuant to this plan, inventories are written down to a fair value of $450,000 and property is written down to a fair value of $730,000. The par value of the common stock is reduced to $0.20/share and one new share replaces two outstanding shares. 80.
Topic: Quasi-reorganization LO 5 After the quasi-reorganization, total assets are reported at: a. b. c. d.
$1,560,000 $1,240,000 $1,220,000 $1,460,000
©Cambridge Business Publishers, 2023 15-28
Advanced Accounting, 5th Edition
ANS: 81.
82.
83.
b
Topic: Quasi-reorganization LO 5 At the completion of the quasi-reorganization process, the balance in additional paid-in capital is: a. b. c. d.
$600,000 $0 $20,000 $40,000
ANS:
b
Topic: Quasi-reorganization LO 5 At the completion of the quasi-reorganization process, the balance in the common stock, $0.20 par account is: a. b. c. d.
$420,000 $ 40,000 $ 20,000 $ 10,000
ANS:
c
Topic: Quasi-reorganization LO 5 The balance in the loans payable account following the quasi-reorganization is: a. b. c. d.
$0 $ 900,000 $ 560,000 $1,220,000
ANS:
d
Notes for Questions 80 – 83: Journal entries for the quasi-reorganization are: Retained earnings Inventories Property Common stock, $2 par
320,000 100,000 220,000 400,000
Common stock, $0.20 par Additional paid-in capital Additional paid-in capital
980,000 Retained earnings
Test Bank, Chapter 15
20,000 380,000 980,000 ©Cambridge Business Publishers, 2023 15-29
The balance sheet immediately following quasi-reorganization is as follows:
Assets Cash Inventories Property (net) Total 84.
85.
86.
Hopeful Company Balance Sheet, post-quasi-reorganization Liabilities and Equity $ 60,000 Loans payable 450,000 Common stock, $0.20 par 730,000 Additional paid-in capital ________ Retained earnings (dated) $1,240,000 Total
$1,220,000 20,000 0 0 $1,240,000
Topic: Troubled debt restructuring LO 5 In a troubled debt restructuring, assets with a book value of $200,000 and a fair value of $190,000 are transferred in full settlement of a $300,000 debt. How is this reported? a. b. c. d.
Gain on restructuring, $100,000 Gain on asset disposition, $100,000 Loss on asset disposition, $10,000; Gain on restructuring, $110,000 Loss on asset disposition, $10,000; Gain on restructuring, $100,000
ANS:
c
Topic: Troubled debt restructuring LO 5 A company owes the bank $1,020,000. Since the company cannot pay this debt, the bank agrees to allow the company to pay $950,000 in two years, plus interest annually at $48,000 per year. What is the gain on restructuring? a. b. c. d.
$0 $50,000 $70,000 $26,000
ANS:
a Total undiscounted payments = $950,000 + $48,000 + $48,000 = $1,046,000 > $1,020,000, so no gain is recorded.
Topic: Troubled debt restructuring LO 5 A company owes the bank $550,000. Since the company cannot pay this debt, the bank agrees to allow the company to pay $400,000 in two years, plus interest of $30,000 per year. What is the gain on restructuring? a. b. c. d.
$150,000 $120,000 $ 90,000 $ 60,000
©Cambridge Business Publishers, 2023 15-30
Advanced Accounting, 5th Edition
ANS:
c Total undiscounted payments = $400,000 + (2 x $30,000) = $460,000 < $550,000, so a gain is recorded. $550,000 - $460,000 = $90,000
Use the following information to answer Questions 87 and 88. At the beginning of 2024, a company borrowed $188,610, with payment of $100,000 to be made at the end of each of the years 2024 and 2025. The loan carries an interest rate of 4%. The company makes the $100,000 payment at the end of 2024 but is experiencing financial difficulties and renegotiates the terms of the loan. The creditor grants a concession by changing the payment due at the end of 2024 to $98,076, which changes the effective loan rate to 2%. No gain on restructuring is reported. 87.
88.
89.
Topic: Troubled debt restructuring LO 5 The company reports interest expense in 2024 in the amount of: a. b. c. d.
$8,000. $3,772. $4,000. $7,544.
ANS:
d 4% x $188,610 = $7,544
Topic: Troubled debt restructuring LO 5 The company reports interest expense in 2025 in the amount of: a. b. c. d.
$3,772. $1,923. $1,772. $2,000.
ANS:
b 2% x ($188,610 – ($100,000 - $7,544)) = $1,923
Topic: Troubled debt restructuring LO 5 A company has 6% debt with a carrying value of $640,000, and repayment terms of $349,078 per year, due at the end of each of the next two years. Due to a sharp decline in revenues, the company cannot make the next payment and negotiates a reduction in the payment to $296,000 per year for the next two years. The change in payment terms qualifies as a troubled debt restructuring. What is the gain on restructuring, and the interest expense recorded by the company for the first $296,000 payment? a. b. c. d.
$0 gain, $38,400 interest expense $0 gain, $0 interest expense $48,000 gain, $52,800 interest expense $48,000 gain, $0 interest expense
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-31
ANS:
90.
d Undiscounted sum of payments = $296,000 x 2 = $592,000 < $640,000 Gain is $640,000 - $592,000 = $48,000 Future payments reduce principal; no future interest expense
Topic: Troubled debt restructuring LO 5 A company has 6% debt with a carrying value of $640,000, and repayment terms of $349,078 per year, due at the end of the next two years. Due to a sharp decline in revenues, the company cannot make the next payment and negotiates a reduction in the yearly payment to $329,626 per year for the two years. The change in payment terms qualifies as a troubled debt restructuring. What is the gain on restructuring, and the interest expense recorded for the first $329,626 payment? a. b. c. d.
$0 gain, $12,800 interest expense $0 gain, $38,400 interest expense $35,664 gain, $12,800 interest expense $35,664 gain, $19,453 interest expense
ANS:
a $329,626 x 2 = $659,252 > $640,000 so no gain is reported New terms change the interest rate to 2%; .02 x $640,000 = $12,800 interest expense
©Cambridge Business Publishers, 2023 15-32
Advanced Accounting, 5th Edition
PROBLEMS 1.
Topic: Liquidation basis of accounting LO 2 On October 1, ToyCity Inc. begins liquidation activities and adopts the liquidation basis of accounting. The book value of its assets total $500,000, including $8,000 in cash, and the book value of its liabilities total $495,000. Expected proceeds from reported assets other than cash are: • • •
Receivables, $60,000 Inventory, $135,000 Plant and equipment, $175,000
Expected costs of liquidating assets are $25,000. Required a. Calculate the cumulative effect of the adjustment to ToyCity’s net assets due to adoption of the liquidation basis of accounting. b. Prepare a statement of net assets in liquidation as of October 1. ANS: a.
Book value of net assets = $500,000 - $495,000 = $5,000 Liquidation value of net assets = $8,000 + $60,000 + $135,000 + $175,000 - $495,000 - $25,000 = $(142,000) $5,000 – (-$142,000) = $147,000 cumulative reduction in net assets
b. ToyCity Inc. Statement of Net Assets in Liquidation October 1 Assets Cash Receivables Inventory Plant and equipment Total assets Liabilities Reported liabilities Accrued liquidation costs Total liabilities Net assets
Test Bank, Chapter 15
$ 8,000 60,000 135,000 175,000 378,000 495,000 25,000 520,000 $(142,000)
©Cambridge Business Publishers, 2023 15-33
2.
Topic: Liquidation basis of accounting LO 2 On October 1, ToyCity Inc. begins liquidation activities and adopts the liquidation basis of accounting. The book value of its assets totaled $500,000, including $8,000 in cash, and the book value of its liabilities totaled $495,000. Expected proceeds from reported assets other than cash at October 1 were: Receivables, $60,000; inventory, $135,000; and plant and equipment, $175,000. Expected costs of liquidating assets were $25,000. During the three months ending December 31, the company collected $25,000 in receivables, sold inventory for $45,000, and paid liquidation costs of $10,000. Reported liabilities of $65,000 were paid. At December 31, estimated valuations on remaining assets, other than cash, and liabilities are as follows: • • •
Receivables, $20,000 Inventory, $60,000 Plant and equipment, $180,000
Newly identified previously unreported assets can be liquidated for an estimated $2,000. Expected remaining costs of liquidating assets are $14,000. A creditor holding a loan with a book value of $25,000 agrees to accept $22,000 as full payment. Required a. Prepare a statement of changes in net assets in liquidation as of December 31. b. Prepare a statement of net assets in liquidation as of December 31. ANS: a. ToyCity Inc. Statement of Changes in Net Assets in Liquidation For the 3 Months Ending December 31 Net assets, October 1 (1) Remeasurement adjustments on assets: Receivables $20,000 – ($60,000 - $25,000) Inventory $60,000 – ($135,000 - $45,000) Plant and equipment $180,000 - $175,000 Items previously not recognized Remeasurement of liabilities $25,000 - $22,000 Adjustment for accrued liquidation costs ($25,000 - $10,000) - $14,000 Net assets, December 31
$(142,000) (15,000) (30,000) 5,000 2,000 3,000 1,000 $(176,000)
(1) $8,000 + $60,000 + $135,000 + $175,000 - $495,000 - $25,000 = $(142,000)
©Cambridge Business Publishers, 2023 15-34
Advanced Accounting, 5th Edition
b. ToyCity Inc. Statement of Net Assets in Liquidation December 31 Assets Cash ($8,000 + $25,000 + $45,000 - $10,000 - $65,000) Receivables Inventory Plant and equipment Items not previously reported Total assets Liabilities Reported liabilities (495,000 - $3,000 - $65,000) Accrued liquidation costs Total liabilities Net assets 3.
$ 3,000 20,000 60,000 180,000 2,000 265,000 427,000 14,000 441,000 $(176,000)
Topic: Liquidation basis of accounting LO 2 On February 1, Toymania Company begins liquidation activities and adopts the liquidation basis of accounting. The book value of its assets totaled $700,000, and the book value of its liabilities totaled $600,000. Toymania’s cash balance was $12,000. Expected proceeds from reported assets other than cash were: Inventory, $100,000; and plant and equipment, $480,000. Expected costs of liquidating assets were $15,000. During the four months ending May 31, the company sold inventory for $70,000, sold equipment for $200,000, and paid liquidation costs of $8,000. Reported liabilities of $268,000 were paid. Toymania owes $50,000 to a creditor who agreed to accept $44,000 as full payment, but payment has not yet been made. At May 31, estimated valuations on remaining assets other than cash are as follows: • •
Inventory, $28,000 Plant and equipment, $275,000
Newly identified previously unreported intangible assets can be liquidated for an estimated $10,000. Expected remaining costs of liquidating assets are $5,000. Required a. Prepare a statement of changes in net assets in liquidation for the four months ending May 31. b. Prepare a statement of net assets in liquidation as of May 31.
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-35
ANS: a. Toymania Company Statement of Changes in Net Assets in Liquidation February 1 - May 31 Net assets, February 1 (1) Remeasurement adjustments on assets: Inventory $28,000 – ($100,000 - $70,000) Plant and equipment $275,000 – ($480,000 - $200,000) Previously unreported intangible assets Remeasurement of liabilities $50,000 - $44,000 Adjustment for accrued liquidation costs $5,000 – ($15,000 - $8,000) Net assets, May 31
$(23,000) (2,000) (5,000) 10,000 6,000 2,000 $(12,000)
(1) $12,000 + $100,000 + $480,000 - $600,000 - $15,000 = $(23,000)
b. Toymania Company Statement of Net Assets in Liquidation May 31 Assets Cash ($12,000 + $70,000 + $200,000 - $8,000 - $268,000) Inventory Plant and equipment Intangible assets Total assets Liabilities Reported liabilities ($600,000 - $268,000 - $6,000) Accrued liquidation costs Total liabilities Net assets
©Cambridge Business Publishers, 2023 15-36
$ 6,000 28,000 275,000 10,000 $319,000 326,000 5,000 331,000 $ (12,000)
Advanced Accounting, 5th Edition
4.
Topic: Liquidation basis of accounting LO 2 On August 1, Equitech Company is entering liquidation. Its balance sheet, prepared using GAAP for a going concern, is as follows: Cash Accounts receivable Inventories Property & equipment, net Intangible assets, net Total assets
$
10,000 125,000 250,000 1,500,000 100,000 $1,985,000
Accounts payable Loans payable Total liabilities
$ 350,000 1,000,000 1,350,000
Equity Total liabilities and equity
635,000 $1,985,000
Equitech adopts the liquidation basis of accounting as of August 1. The following information is available concerning valuations: 1. Expected proceeds from liquidation of reported assets, other than cash: • Accounts receivable, $100,000 • Inventories, $200,000 • Property and equipment, $900,000 • Intangible assets, $0 2. Expected direct costs of liquidating reported assets: • Accounts receivable, $2,000 • Inventories, $3,000 • Property and equipment, $15,000 3. Expected compensation to be paid during the liquidation period is $40,000. 4. The company has outstanding customer orders that it plans to fulfill during the liquidation period. Estimated revenues on these orders are $50,000, and estimated cash costs of fulfilling the orders are $34,000. During the three-month period ending October 31, Equitech collected accounts receivable of $45,000, sold inventory for $150,000 and property for $50,000, paid liquidation costs of $6,000, and paid compensation of $30,000. Net cash collected from customer orders totaled $9,000. Equitech paid the following reported liabilities: $60,000 accounts payable and $163,000 loans payable. The following information is available concerning estimated valuations on October 31: 1. Expected proceeds from liquidation of remaining assets, other than cash: • Accounts receivable, $60,000 • Inventories, $40,000 • Property and equipment, $700,000 2. Expected costs of liquidating remaining assets: • Accounts receivable, $200 • Inventories, $100 • Property and equipment, $14,700 3. Compensation to be paid is $12,000. 4. Estimated revenues on orders to be fulfilled are $20,000, and estimated cash costs of fulfilling these orders are $15,000.
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-37
Required a. Prepare a statement of changes in net assets in liquidation for the three months ending October 31. b. Prepare a statement of net assets in liquidation as of October 31. ANS: a. Equitech Company Statement of Changes in Net Assets in Liquidation August 1 - October 31 Net assets, August 1 (1) Remeasurement adjustments on assets: Accounts receivable $60,000 – ($100,000 - $45,000) Inventories $40,000 – ($200,000 - $150,000) Property and equipment $700,000 – ($900,000 - $50,000) Accrued income receivable $5,000 – ($16,000 - $9,000) Adjustment for accrued liquidation costs $15,000 - ($20,000 - $6,000) Adjustment for accrued compensation $12,000 - ($40,000 - $30,000) Net assets, October 31
$(184,000) 5,000 (10,000) (150,000) (2,000) (1,000) (2,000) $(344,000)
(1) $(184,000) = $10,000 + $100,000 + $200,000 + $900,000 + $50,000 - $34,000 - $20,000 - $40,000 - $350,000 - $1,000,000
b. Equitech Company Statement of Net Assets in Liquidation October 31 Assets Cash ($10,000 + $45,000 + $150,000 + $50,000 - $6,000 - $30,000 + $9,000 – $60,000 - $163,000) Accounts receivable Inventories Property and equipment Accrued income receivable Total assets Liabilities Accounts payable ($350,000 - $60,000) Loans payable ($1,000,000 - $163,000) Accrued liquidation costs Accrued compensation costs Total liabilities Net assets
©Cambridge Business Publishers, 2023 15-38
$
5,000 60,000 40,000 700,000 5,000 $ 810,000
290,000 837,000 15,000 12,000 1,154,000 $(344,000)
Advanced Accounting, 5th Edition
5.
Topic: Liquidation basis of accounting LO 2 Provence Company began reporting using the liquidation basis of accounting on January 1. It is now June 30, and its balance sheet is as follows: Provence Company Statement of Net Assets in Liquidation June 30 Assets Cash Inventories Equipment Total assets Liabilities Accounts payable Loan payable Accrued liquidation costs Total liabilities Net assets
$ 2,700 8,100 108,000 118,800 67,500 56,700 8,100 132,300 $(13,500)
During the next six months, the following events occurred: 1. 2. 3. 4. 5.
The company’s owner believes he may be able to negotiate the loan payable balance down to $32,400. Customer orders priced at $27,000 were discovered; estimated profit is 35% on price, and the orders have not yet been delivered at year-end. Previously unreported software is discovered. Its estimated value is $9,000, and costs to sell it are estimated to be $1,600. These transactions occurred: Inventory was sold for $4,000; equipment was sold for $54,000; liquidation costs of $5,400 were paid; accounts payable of $25,600 were paid and $24,000 was paid on the loan. End-of-year liquidation values of remaining items other than cash are: a. Inventories, $2,700 b. Equipment, $50,000 c. Software, $9,000 d. Estimated liquidation costs (not including costs to liquidate the software), $11,000
Required Prepare Provence Company’s statement of changes in net assets in liquidation for the six months ending December 31.
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-39
ANS: Provence Company Statement of Changes in Net Assets in Liquidation July 1 - December 31 Net assets, July 1 Remeasurement adjustments on assets: Receivables $27,000 x 35% Inventories $2,700 – ($8,100 - $4,000) Equipment $50,000 – ($108,000 - $54,000) Software Adjustment for accrued liquidation costs ($11,000 + $1,600) – ($8,100 - $5,400) Net assets, December 31 6.
$(13,500) 9,450 (1,400) (4,000) 9,000 (9,900) $(10,350)
Topic: Liquidation basis of accounting LO 2 Marin Company is in the process of liquidating, and is using the liquidation basis of accounting. Its beginning and ending statements of net assets in liquidation and its statement of changes in net assets in liquidation for the six months ending June 30 are as follows: Marin Company Statement of Net Assets in Liquidation January 1
June 30
Assets Cash Accounts receivable Inventory Property Total assets
$ 8,000 30,000 45,000 150,000 233,000
$ 11,000 10,000 15,000 60,000 96,000
Liabilities Accounts payable Accrued compensation Accrued liquidation costs Total liabilities Net assets
191,000 35,000 17,000 243,000 $ (10,000)
103,500 10,000 6,000 119,500 $ (23,500)
Marin Company Statement of Changes in Net Assets in Liquidation January 1 - June 30 Beginning net assets $ (10,000) Remeasurement of assets Receivables 4,000 Inventory (15,000) Property (25,000) Remeasurement of liabilities Accrued compensation 12,000 Accrued liquidation costs 10,500 Ending net assets $(23,500) ©Cambridge Business Publishers, 2023 15-40
Advanced Accounting, 5th Edition
Required Prepare a schedule of cash received from the liquidation of assets and cash disbursed for payment of liabilities during the six months ending June 30. ANS: Marin Company Schedule of Cash Receipts and Disbursements For the Six Months Ended June 30 Beginning cash balance Plus cash received Collection of receivables $30,000 + $4,000 - $10,000 = Liquidation of inventory $45,000 - $15,000 - $15,000 = Liquidation of property $150,000 - $25,000 - $60,000 = Less cash paid Compensation $35,000 - $12,000 - $10,000 = Liquidation costs $17,000 - $10,500 - $6,000 = Accounts payable $191,000 - $103,500 = Ending cash balance 7.
$ 8,000 24,000 15,000 65,000 (13,000) (500) (87,500) $ 11,000
Topic: Chapter 7 bankruptcy: Statement of affairs LO 3 The following information is available for Copout Corporation, which has filed for Chapter 7 bankruptcy protection: Wages and taxes payable (priority) Fully secured liabilities Partially secured liabilities Realizable value of assets held as security for fully secured liabilities Realizable value of assets held as security for partially secured liabilities Realizable value of unsecured assets Unsecured liabilities
$ 70,000 90,000 80,000 200,000 50,000 220,000 330,000
Required a. Present a statement of affairs for Copout Corporation, in good form. b. Calculate the estimated recovery rate to unsecured creditors without priority. Round your answer to the nearest tenth of a percent.
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-41
ANS: a. Free Assets Fully secured assets Less fully secured liabilities Partially secured assets
$200,000 (90,000)
$ 110,000
50,000
Unsecured assets Total free assets Less priority liabilities Net free assets Estimated deficiency Total unsecured liabilities
220,000 330,000 (70,000) 260,000 100,000 $360,000 Unsecured Liabilities
Fully secured liabilities
90,000
Partially secured liabilities Less assets pledged
80,000 (50,000)
Priority liabilities
70,000
Unsecured liabilities Total unsecured liabilities b. 8.
$ 30,000
330,000 $360,000
$260,000/$360,000 = 72.2% estimated recovery rate
Topic: Chapter 7 bankruptcy: Statement of affairs LO 3 The following information is available for Reddinot Company, which has filed for Chapter 7 bankruptcy protection: Priority liabilities Fully secured liabilities Partially secured liabilities Unsecured liabilities Realizable value of assets held as security for fully secured liabilities Realizable value of assets held as security for partially secured liabilities Realizable value of unsecured assets
$ 100,000 250,000 340,000 200,000 325,000 300,000 50,000
Required a. Present a statement of affairs for Reddinot Company, in good form. b. Calculate the estimated recovery rate to partially secured creditors and unsecured creditors without priority. Round your answers to the nearest tenth of a percentage.
©Cambridge Business Publishers, 2023 15-42
Advanced Accounting, 5th Edition
ANS: a. Free Assets Fully secured assets Less fully secured liabilities
$325,000 (250,000)
Partially secured assets
300,000
Unsecured assets Total free assets Less priority liabilities Net free assets Estimated deficiency Total unsecured liabilities
$ 75,000
50,000 125,000 (100,000) 25,000 215,000 $240,000 Unsecured Liabilities
Fully secured liabilities
250,000
Partially secured liabilities Less assets pledged
340,000 (300,000)
Priority liabilities
100,000
$ 40,000
Unsecured liabilities Total unsecured liabilities b.
9.
200,000 $240,000
[$300,000 + ($40,000 x 10.4%)]/$340,000 = 89.5% estimated recovery rate for partially secured creditors; $25,000/$240,000 = 10.4% estimated recovery rate for unsecured creditors without priority
Topic: Chapter 7 bankruptcy: Statement of affairs LO 3 A company is in Chapter 7 bankruptcy, and you have compiled the following data: Liabilities: Wages and taxes payable (priority) Accounts payable (unsecured) Loan payable (secured by the equipment) Mortgage payable (secured by the land and building) Loan payable (unsecured) Total Realizable value of assets: Cash Receivables Merchandise Land and building Equipment Total
Test Bank, Chapter 15
$
50,000 100,000 350,000 780,000 150,000 $1,430,000
$
5,000 15,000 45,000 700,000 400,000 $1,165,000
©Cambridge Business Publishers, 2023 15-43
Required a. Prepare a statement of affairs for the company. b. What amount can the holder of the unsecured loan payable expect to receive? Round your answer to the nearest dollar. ANS: a. Free Assets Fully secured equipment Less fully secured loan payable Partially secured land and building Free assets: Cash Receivables Merchandise Total free assets Less unsecured priority liabilities Net free assets Estimated deficiency to unsecured creditors Total unsecured liabilities
b.
$
400,000 (350,000)
$ 50,000
700,000
5,000 15,000 45,000
Fully secured loan payable
$ 350,000
Partially secured land and building Less land and building
780,000 (700,000)
Wages and taxes payable (priority)
50,000
Unsecured creditors: Accounts payable Loan payable Total unsecured liabilities
100,000 150,000
65,000 115,000 (50,000) 65,000 265,000 $330,000 Unsecured Liabilities
80,000
250,000 $330,000
($65,000/$330,000) x $150,000 = $29,545
©Cambridge Business Publishers, 2023 15-44
Advanced Accounting, 5th Edition
10.
Topic: Chapter 7 bankruptcy: Statement of affairs LO 3 The following information is available for Clueless Corporation, which has filed for Chapter 7 bankruptcy: Liabilities: Administrative expenses payable to trustee (priority) Taxes payable (priority) Unsecured liabilities Fully secured liabilities Partially secured liabilities
$ 33,000 22,000 550,000 190,000 350,000
Realizable value of assets: Assets pledged to fully secured creditors Assets pledged to partially secured creditors Unsecured assets
$ 250,000 275,000 80,000
Required a. Prepare a statement of affairs for Clueless Corporation. b. Calculate the estimated recovery rate (cents on the dollar) for (1) unsecured and (2) partially secured creditors. Round your answers to the nearest tenth of a cent, if necessary. ANS: a. Free Assets Assets pledged to fully secured creditors Less liabilities to fully secured creditors Assets pledged to partially secured creditors Unsecured assets Total free assets Less priority liabilities Net free assets Estimated deficiency to unsecured creditors Total unsecured liabilities
$ 250,000 (190,000)
$ 60,000
275,000 80,000 140,000 (55,000) 85,000 540,000 $625,000 Unsecured Liabilities
b.
Fully secured liabilities
$ 190,000
Partially secured liabilities Less value of pledged assets Priority liabilities Unsecured liabilities Total unsecured liabilities
350,000 (275,000) 55,000
(1) (2)
Test Bank, Chapter 15
$ 75,000 550,000 $625,000
Unsecured: $85,000/$625,000 = 13.6 cents on the dollar Partially secured: [$275,000 + ($75,000 x 13.6%)]/$350,000 = 81.5 cents on the dollar ©Cambridge Business Publishers, 2023 15-45
11.
Topic: Chapter 7 bankruptcy: Statement of affairs LO 3 Finito Corporation has filed for Chapter 7 bankruptcy. A trustee is appointed to liquidate the company's assets and pay creditors in accordance with the provisions of the bankruptcy laws. Finito’s balance sheet, prepared using GAAP for continuing businesses, is as follows: Assets Cash Accounts receivable Inventories Prepaid expenses Building, net Equipment, net Intangible assets Total assets Liabilities and shareholders' equity Accounts payable (unsecured) Accrued wages (priority) Accrued taxes (priority) Loan payable (unsecured) Note payable (secured by building) Capital stock Retained earnings (deficit) Total liabilities and shareholders' equity
$
10,000 85,000 200,000 40,000 400,000 250,000 300,000 $1,285,000 $ 320,000 160,000 105,000 425,000 250,000 100,000 (75,000) $1,285,000
Additional information: 1. It is estimated that $50,000 of the accounts receivable will be collected. 2. The inventories will likely be sold at a price approximating 75% of book value. 3. A refund of $15,000 is expected on the prepaid expenses. 4. The building is appraised at $275,000, and the equipment is appraised at $300,000. The intangible assets have no realizable value. Required a. Prepare a statement of affairs for Finito Corporation b. Compute the following: i. Total cash expected to be distributed ii. Expected payments to partially secured, priority, and unsecured creditors. Round your answers to the nearest dollar. Note: The totals in requirements ii and iii should be the same.
©Cambridge Business Publishers, 2023 15-46
Advanced Accounting, 5th Edition
ANS: a. Free Assets Asset pledged to fully secured creditors Less: Note payable Unsecured assets: Cash Accounts receivable Inventories Prepaid expenses Equipment Total free assets Less priority liabilities Net free assets Estimated deficiency to unsecured creditors Total unsecured liabilities
$275,000 (250,000)
$ 25,000 $
10,000 50,000 150,000 15,000 300,000 550,000 (265,000) 285,000 460,000 $ 745,000
Unsecured Liabilities Fully secured creditor: Note payable Priority liabilities Unsecured liabilities: Accounts payable Loan payable Total unsecured liabilities b.
i.
ii.
Total cash to be distributed Cash obtained from: Cash Accounts receivable Inventories Prepaid expenses Building Equipment Total cash to be distributed
$250,000 265,000 $ 320,000 425,000 $ 745,000
$ 10,000 50,000 150,000 15,000 275,000 300,000 $800,000
Expected payments Expected recovery percentage = $285,000/$745,000 = 38.26%
Priority liabilities (100%) Fully secured liabilities (100%) Unsecured liabilities: [($320,000 + $425,000) x 38.26% Total cash to be distributed
Test Bank, Chapter 15
Expected Payment $265,000 250,000 285,000 $800,000
©Cambridge Business Publishers, 2023 15-47
12.
Topic: Chapter 7 bankruptcy: Statement of affairs LO 3 Here is the balance sheet of Falencia Company, as it enters Chapter 7 bankruptcy: Assets Cash Accounts receivable, net Raw materials inventory Finished goods inventory Prepaid advertising and insurance Investments Buildings and equipment, net Intangible assets Total assets
1,000 120,000 110,000 250,000 15,000 30,000 1,400,000 250,000 $ 2,176,000
Liabilities and shareholders' equity Accounts payable Bank loan payable Accrued federal taxes payable Accrued salaries and wages payable Mortgage payable Notes payable Capital stock Retained earnings (deficit) Total liabilities and equity
$ 350,000 425,000 40,000 20,000 1,000,000 350,000 70,000 (79,000) $ 2,176,000
$
Additional information: 1. $30,000 of reported accounts receivable will likely not be received. 2. The raw materials have a realizable value of $90,000, and the finished goods have a realizable value of $200,000. The notes payable are secured by the inventory balances. 3. There is no refund allowed on prepaid advertising and insurance. 4. The investments consist of held-to-maturity debt securities with a realizable value of $35,000. 5. The buildings and equipment have a realizable value of $1,100,000, and are security for the mortgage. 6. The intangible assets are the result of an acquisition in a previous year; they have no realizable value now. 7. All liabilities other than the note and the mortgage are unsecured. Priority items are within statutory limits. 8. Falencia Company has been named as the defendant in a lawsuit, which is not reported on its balance sheet. The lawsuit is expected to be settled out of court for $100,000, which will be the responsibility of Falencia Company. 9. Expected legal, accounting, and administrative costs of the bankruptcy are $50,000. Required a. Prepare a statement of affairs. b. Calculate the total amount, in dollars, that creditors can expect to receive upon liquidation. c. How much, in dollars, can each class of creditors (priority, fully secured, partially secured, and unsecured) expect to receive? Round your answers to the nearest dollar, if necessary. Note: The totals in requirements b and c should be the same. ©Cambridge Business Publishers, 2023 15-48
Advanced Accounting, 5th Edition
ANS: a. Free Assets Assets pledged to fully secured creditors: Buildings and equipment Less liabilities to fully secured creditors: Mortgage payable Assets pledged to partially secured creditors: Raw materials inventory Finished goods inventory Unsecured assets: Cash Accounts receivable Investments Total free assets Less priority liabilities: Accrued federal taxes payable Accrued salaries and wages payable Expected trustee expenses Net free assets Estimated deficiency to unsecured creditors Total unsecured liabilities
Fully secured liabilities Partially secured liabilities: Notes payable Less value of pledged assets: Raw materials inventory Finished goods inventory Priority liabilities: Accrued federal taxes payable Accrued salaries and wages payable Expected trustee expenses Unsecured liabilities: Accounts payable Bank loan payable Expected lawsuit liability Total unsecured liabilities
Test Bank, Chapter 15
$ 1,100,000 (1,000,000)
$ 100,000
90,000 200,000 290,000 1,000 90,000 35,000 226,000 40,000 20,000 50,000
(110,000) 116,000 819,000 $ 935,000 Unsecured Liabilities
$1,000,000 350,000 (90,000) (200,000)
$ 60,000
40,000 20,000 50,000 110,000 350,000 425,000 100,000
875,000 $ 935,000
©Cambridge Business Publishers, 2023 15-49
b. Cash Accounts receivable Raw materials inventory Finished goods inventory Investments Buildings and equipment Total
$
1,000 90,000 90,000 200,000 35,000 1,100,000 $1,516,000
Priority claims Fully secured claims Partially secured claims (1) Unsecured claims (2) Total
$ 110,000 1,000,000 297,444 108,556 $1,516,000
c.
(1) $290,000 + [($350,000 - $290,000) x ($116,000/$935,000)] = $297,444 (2) $875,000 x ($116,000/$935,000) = $108,556
13.
Topic: Chapter 7 bankruptcy: Statement of realization and liquidation LO 3 The balance sheet of Faillite Company is as follows: Accounts receivable Merchandise Plant and equipment, net
$ 100 400 1,500 _____ $2,000
Accounts payable Loan payable Note payable Shareholders' equity
$ 500 1,400 700 (600) $2,000
All liabilities are unsecured. Faillite enters Chapter 7 bankruptcy proceedings. During the next few months, the following transactions were completed: • • • •
Received $80 from customers in payment of reported receivables; the remaining receivables were determined to be uncollectible. Sold merchandise with a book value of $300 for $310 in cash. Accrued wages of $40 and taxes of $15. Paid $300 in cash in settlement of a $320 loan payable.
Required Prepare a statement of realization and liquidation for this period.
©Cambridge Business Publishers, 2023 15-50
Advanced Accounting, 5th Edition
ANS: Assets to be realized Accounts receivable Merchandise Plant and equipment Liabilities to be liquidated Accounts payable Loan payable Note payable Liabilities incurred Accrued wages Accrued taxes Gain on asset realization Merchandise Combined total Assets realized Accounts receivable Merchandise Assets not realized Merchandise Plant and equipment Liabilities liquidated Loan payable Liabilities not liquidated Accrued expenses Accounts payable Loan payable Note payable Loss on asset realization Receivables Gain on liability liquidation Loan payable Combined total
Test Bank, Chapter 15
$ 100 400 1,500
$2,000
500 1,400 700
2,600
40 15
55 10 $4,665
$ 80 310
$ 390
100 1,500
1,600 300
55 500 1,080 700
2,335
20 20
40 $4,665
©Cambridge Business Publishers, 2023 15-51
14.
Topic: Chapter 7 bankruptcy: Statement of realization and liquidation LO 3 The balance sheet of Fracaso Company is as follows: Cash Accounts receivable Merchandise Plant and equipment, net
$
20 150 350 2,000 $2,520
Loans payable Shareholders' equity
$2,670 (150) _____ $2,520
All liabilities are unsecured. Fracaso enters Chapter 7 bankruptcy proceedings. During the next two months, the following transactions were completed: • • • • •
Received $125 from customers in payment of reported receivables. The rest of the receivables were determined to be uncollectible. Sold all merchandise for $300 in cash. Sold plant and equipment with a book value of $1,800 for $1,600. Accrued trustee expenses of $10. Paid $2,000 of loans.
Required Prepare a statement of realization and liquidation for the two-month period. ANS: Assets to be realized Accounts receivable Merchandise Plant and equipment Liabilities to be liquidated Loans payable Liabilities incurred Accrued trustee expenses Combined total Assets realized Accounts receivable Merchandise Plant and equipment Assets not realized Plant and equipment Liabilities liquidated Loans payable Liabilities not liquidated Accrued expenses Loans payable Losses on asset realization Receivables Merchandise Plant and equipment Combined total ©Cambridge Business Publishers, 2023 15-52
$ 150 350 2,000
$2,500 2,670 10 $5,180
$ 125 300 1,600
$2,025 200 2,000
10 670 25 50 200
680
275 $5,180 Advanced Accounting, 5th Edition
15.
Topic: Chapter 7 bankruptcy: Statement of realization and liquidation LO 3 Konkurs Corporation is entering Chapter 7 bankruptcy. Its balance sheet is as follows: Cash Accounts receivable Inventory Land Building, net Equipment, net
$ 3,400 18,000 6,000 15,000 80,000 43,300 $165,700
Accounts payable Notes payable—equipment Bank loan payable Mortgage payable Shareholders' equity
$ 81,500 14,000 57,000 60,000 (46,800) ______ $165,700
During the first month, the trustee completed the following transactions: 1. 2. 3. 4.
Accepted $11,500 in full settlement of all outstanding receivables. Sold equipment (book value $13,000) for $21,000 and paid the related note. Made a $2,000 payment on the mortgage. Made a partial payment on accounts payable and the bank loan, equal to 10% of the outstanding obligation.
Required Prepare a statement of realization and liquidation for the month. ANS: Assets to be realized Accounts receivable Inventory Land Building Equipment Liabilities to be liquidated Accounts payable Notes payable—equipment Bank loan payable Mortgage payable Gain on asset realization: Equipment Combined total
Test Bank, Chapter 15
$18,000 6,000 15,000 80,000 43,300 81,500 14,000 57,000 60,000
$162,300
212,500 8,000 $382,800
©Cambridge Business Publishers, 2023 15-53
Assets realized Accounts receivable Equipment Assets not realized Inventory Land Building Equipment Liabilities liquidated Accounts payable Notes payable Loan payable Mortgage payable Liabilities not liquidated Accounts payable Loan payable Mortgage payable Loss on asset realization: Accounts receivable Combined total
$11,500 21,000
$ 32,500
6,000 15,000 80,000 30,300
131,300
8,150 14,000 5,700 2,000
29,850
73,350 51,300 58,000
182,650 6,500 $382,800
Use the following data for Questions 16 – 18: On July 1, you were appointed trustee for the Fallimento Company, which is in Chapter 7 bankruptcy. Fallimento’s balance sheet on July 1 is as follows: Assets Cash Accounts receivable Merchandise Equipment Total
$ 5,000 60,000 30,000 100,000 $195,000
Liabilities and Equity Loan payable Note payable Equity (deficit) Total
$170,000 40,000 (15,000) ______ $195,000
The note is secured by the equipment. All other liabilities are unsecured. During the next two months, you completed the following transactions: • • • • •
Collected $40,000 on the accounts receivable. The remainder are considered uncollectible. Sold half the merchandise for $20,000. Sold the equipment for $90,000 and paid the note. Accrued administrative expenses of $4,000. Paid $100,000 on the loan.
©Cambridge Business Publishers, 2023 15-54
Advanced Accounting, 5th Edition
16.
Topic: Chapter 7 bankruptcy: Statement of realization and liquidation LO 3 Required Prepare a statement of realization and liquidation. ANS: Statement of Realization and Liquidation Assets to be realized Accounts receivable Merchandise Equipment Liabilities to be liquidated Loan payable Note payable Liabilities incurred: Accrued administrative expenses Gain on asset realization Sale of merchandise Combined total Assets realized Accounts receivable Merchandise Equipment Assets not realized Merchandise Liabilities liquidated Loan payable Note payable Liabilities not liquidated Loan payable Accrued administrative expenses Loss on asset realization Accounts receivable Equipment Combined total
Test Bank, Chapter 15
$ 60,000 30,000 100,000
$ 190,000
170,000 40,000
210,000 4,000 5,000 $ 409,000
$ 40,000 20,000 90,000
$ 150,000 15,000
100,000 40,000
140,000
70,000 4,000
74,000
20,000 10,000
30,000 $ 409,000
©Cambridge Business Publishers, 2023 15-55
17.
Topic: Chapter 7 bankruptcy: Statement of estate equity LO 3 Required Prepare the statement of estate equity. ANS: Statement of Estate Deficit Losses on realization of assets Gain on realization of assets Administrative expenses incurred Change in estate equity Estate equity, beginning Estate equity, ending
18.
$(30,000) 5,000 (4,000) (29,000) (15,000) $(44,000)
Topic: Chapter 7 bankruptcy: Balance sheet LO 3 Required Prepare the trustee’s balance sheet. ANS: Assets Cash Merchandise Total
Balance Sheet Liabilities and equity $ 15,000 Accrued expenses 15,000 Loan payable _____ Estate equity (deficit) $30,000 Total
$ 4,000 70,000 (44,000) $30,000
Use the following information to answer Questions 19 and 20. On July 1, Underwater Corporation filed for Chapter 11 reorganization, and a plan of reorganization was formulated. All of the company's prepetition liabilities were considered subject to compromise, except for a note payable that is fully secured by property. During the following six months, the following transactions took place: • • • • •
Excess property was sold for $550,000, resulting in a $50,000 loss. Termination of a lease resulted in a $10,000 cancellation penalty (paid in cash). $30,000 was paid in cash for professional fees. $100,000 of excess cash was invested in securities. $3,000 of interest revenue was received on investments of excess cash.
At December 31, Underwater's balance sheet appeared as follows: Cash $ 250,000 Current liabilities (postpetition) Accounts receivable 250,000 Note payable (prepetition, fully secured) Inventories 350,000 Liabilities subject to compromise Prepaid expenses 15,000 Common stock Property & equipment (net) 2,300,000 Retained earnings (deficit) Investments 100,000 Total $3,265,000 Total
©Cambridge Business Publishers, 2023 15-56
$ 300,000 1,000,000 2,000,000 150,000 (185,000) ________ $3,265,000
Advanced Accounting, 5th Edition
Other relevant data for the year: Revenues Operating expenses Income tax expense Cash flows from normal operating activities Capital expenditures Payment of prepetition debt, as authorized by the court Payment of postpetition debt 19.
$4,500,000 4,400,000 4,000 50,000 85,000 150,000 45,000
Topic: Financial reporting during reorganization: Income statement LO 4 Required Prepare an income statement for Underwater Corporation for the year ended December 31, in the format required during reorganization. ANS: Income Statement During Reorganization Revenues Expenses Income before reorganization items and taxes Reorganization items: Professional fees $(30,000) Lease termination penalty (10,000) Property loss (50,000) Interest revenue 3,000 Income before taxes Tax expense Net income
Test Bank, Chapter 15
$4,500,000 4,400,000 100,000
(87,000) 13,000 (4,000) $ 9,000
©Cambridge Business Publishers, 2023 15-57
20.
Topic: Financial reporting during reorganization: Statement of cash flows LO 4 Required Prepare a statement of cash flows for Underwater Corporation for the year ended December 31, in the format required during reorganization. ANS: Statement of Cash Flows During Reorganization Cash flows from operating activities: Operating cash flows from reorganization items: Interest revenue $ 3,000 Lease termination penalty (10,000) Professional fees (30,000) Cash flows from investing activities: Investment in securities Capital expenditures Sale of property due to reorganization
(100,000) (85,000) 550,000
Cash flows from financing activities: Payment of prepetition debt Payment of postpetition debt Net increase in cash 21.
(150,000) (45,000)
$ 50,000
(37,000) 13,000
365,000
(195,000) $183,000
Topic: Reorganization value LO 4 Haviland, Inc. is about to emerge from Chapter 11 reorganization, and qualifies for fresh start reporting. Its reported assets are as follows: Cash Inventories Plant and equipment Total assets
$
50,000 250,000 900,000 $1,200,000
Plant and equipment with a book value of $100,000 will be sold for an estimated $75,000. The remaining reported assets will be used in operations. The estimated fair market values of the remaining assets are as follows: Cash $ 50,000 Inventories 150,000 Plant and equipment 600,000 Total reported assets $ 800,000 There are no previously unreported identifiable assets. Operations are expected to generate a net cash flow of $125,000 per year for the next 15 years. A discount rate of 8% is deemed appropriate.
©Cambridge Business Publishers, 2023 15-58
Advanced Accounting, 5th Edition
Required a. Calculate Haviland's reorganization value. The present value of an annuity of $1/year for 15 years at 8% is $8.56. b. Calculate the amount of goodwill, if any, that will be reported on the emerging company's balance sheet. ANS: a. Expected proceeds from sale of assets Present value of future cash flows [= $125,000 x 8.56] Reorganization value
$ 75,000 1,070,000 $1,145,000
Reorganization value Estimated fair values of identifiable assets [= $75,000 + $800,000] Goodwill
$1,145,000 875,000 $ 270,000
b.
22.
Topic: Reorganization value LO 4 Ordenado Company is about to emerge from Chapter 11 reorganization. Its assets will be used in operations, and have estimated fair values as follows: Current assets Buildings and equipment Total reported assets
$ 290,000 3,900,000 $4,190,000
Previously unreported intangible assets have a fair value of $400,000. Operations are expected to generate a net cash flow of $200,000 in the first year following reorganization and growing at a 1% rate in perpetuity. A risk-adjusted discount rate of 5% is deemed appropriate. Required a. Calculate Ordenado's reorganization value. b. Calculate the amount of goodwill, if any, that will be reported on the emerging company's balance sheet. ANS: a. b.
$200,000/(0.05 – 0.01) = $5,000,000 Reorganization value Estimated fair values of identifiable assets [= $4,190,000 + $400,000] Goodwill
Test Bank, Chapter 15
$5,000,000 4,590,000 $ 410,000
©Cambridge Business Publishers, 2023 15-59
23.
Topic: Reorganization entries and balance sheet LO 4 Carter Company is emerging from reorganization and qualifies for fresh start reporting. Carter’s balance sheet is as follows: Current assets Property Identifiable intangibles Goodwill Total
$ 460,000 1,100,000 235,000 185,000 $1,980,000
Loan payable Note payable Common stock Retained deficit Total
$ 550,000 1,480,000 370,000 (420,000) $1,980,000
Reorganization value is $1,390,000, allocated to Carter’s individual assets as follows: current assets, $400,000; property, $900,000; and identifiable intangibles, $90,000. The agreed-on reorganization plan is as follows: replace the loan payable and the note payable with a note payable of $1,200,000 and 70% of new common stock. The old common stock is canceled and old shareholders receive 30% of the new common stock. Required Prepare the journal entries necessary to implement the reorganization plan, and present Carter’s balance sheet as it emerges from reorganization. ANS: Loss on asset revaluation Current assets Property Identifiable intangibles Goodwill To write down assets.
590,000 60,000 200,000 145,000 185,000
Loan payable 550,000 Note payable (old) 1,480,000 Note payable (new) Common stock (new) Gain on restructuring To record discharge of debt. $133,000 = 70% x $190,000; $190,000 = $1,390,000 - $1,200,000.
1,200,000 133,000 697,000
Common stock (old) 370,000 Common stock (new) Additional paid-in capital To record exchange of old for new stock; $57,000 = 30% x $190,000
57,000 313,000
Gain on restructuring Additional paid-in capital Loss on asset revaluation Retained earnings To close accounts and eliminate retained earnings deficit.
©Cambridge Business Publishers, 2023 15-60
697,000 313,000 590,000 420,000
Advanced Accounting, 5th Edition
Carter Company Post-Reorganization Balance Sheet Current assets Property Identifiable intangibles Total assets 24.
$ 400,000 900,000 90,000 $1,390,000
Note payable Common stock
$1,200,000 190,000 ______ $1,390,000
Total liabilities and equity
Topic: Fresh start reporting LO 4 Collins Corporation is emerging from reorganization on January 1, 2024, and qualifies for fresh start reporting. Collins currently has the following balance sheet (in thousands): Total assets
Total
$21,500 Postpetition liabilities Liabilities subject to compromise Common stock _____ Retained deficit $21,500 Total
$ 2,200 21,000 325 (2,025) $21,500
Collins’ 3-year strategic plan estimates the following future operating cash flows (in thousands): $850 in 2024, $950 in 2025, $750 in 2026. After 2026, cash flows grow at a rate of 8% per year indefinitely, based on the 2026 forecast (e.g. 2027 cash flow is estimated at 108% of $750, etc. The appropriate risk-adjusted discount rate is 12%. The company also has $200 excess cash. The liabilities subject to compromise will receive the $200 in cash, plus 4% notes payable in the amount of $13,156, and 80% of the new common stock. Existing owners get 20% of the new common stock. Required a. Calculate total reorganization value. Assume for simplicity that cash flows occur at the end of the year. Round to the nearest thousand. b. What is the total value of the new common stock? c. Prepare the entries necessary to record the reorganization plan. d. Present Collins’ balance sheet as it emerges from reorganization. ANS: a. Present value of cash flows: 2024 2025 2026 Terminal value Present value of future cash flows Excess cash Total reorganization value
$850/1.12 $950/(1.12)2 $750/(1.12)3 [($750/(0.12-0.08))]/(1.12)3
$
759 757 534 13,346 $15,396 200 $15,596
b. $15,396 - $2,200 - $13,156 = $40
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-61
c. Discharge debt: Liabilities subject to compromise Cash Notes payable Common stock Gain on discharge of debt To record settlement of prepetition liabilities.
21,000 200 13,156 32 7,612
Revalue assets: Loss on revaluation 5,904 Various assets To revalue assets. Loss on revaluation = $21,500 - $200 - $15,396 = $5,904. Restructure prior shareholders’ interests: Common stock (old) Common stock (new) Additional paid-in capital To record creation of new equity interests. Close gains and losses and eliminate the retained deficit: Gain on discharge of debt Additional paid-in capital Loss on revaluation Retained deficit
5,904
325 8 317
7,612 317 5,904 2,025
d.
(in thousands) Various assets
Total assets
©Cambridge Business Publishers, 2023 15-62
Collins Company Balance Sheet Following Reorganization $15,396 Postpetition liabilities Notes payable _____ Common stock $15,396 Total liabilities and equity
$2,200 13,156 40 $15,396
Advanced Accounting, 5th Edition
25.
Topic: Fresh start reporting LO 4 A company in reorganization shows the following balance sheet: Assets
$ 5,000
Total
_____ $ 5,000
Postpetition liabilities Prepetition fully secured liabilities Liabilities subject to compromise Common stock Retained earnings (deficit) Total
$ 400 1,000 4,200 200 (800) $ 5,000
The company's reorganization value is $3,500. Liabilities subject to compromise are to be settled by issuing, to the creditors, long-term debt of $1,900 and 60% of the new voting common stock. The remaining common stock will go to the existing shareholders. Required a. Show why this reorganization qualifies for fresh start reporting. b. Present the balance sheet of the company following emergence from reorganization, assuming the plan is implemented as described above. ANS: a.
Reorganization value of $3,500 is less than the total of postpetition liabilities plus prepetition allowed claims (= $400 + $1,000 + 4,200 = $5,600) and less than 50% of the new stock goes to existing shareholders (existing shareholders get 40% of the new stock).
b. Assets
Total
Test Bank, Chapter 15
Balance Sheet After Reorganization $3,500 Postpetition liabilities Prepetition fully secured liabilities Long-term debt _____ Common stock $3,500 Total
$ 400 1,000 1,900 200 $3,500
©Cambridge Business Publishers, 2023 15-63
26.
Topic: Fresh start reporting LO 4 Nouveau Corporation is emerging from reorganization proceedings under Chapter 11 of the bankruptcy laws. The company’s balance sheet is as follows: Cash Accounts receivable Inventories Plant and equipment, net Total assets
$
300,000 800,000 2,000,000 10,000,000 $13,100,000
Postpetition liabilities Liabilities subject to compromise Common stock Retained earnings Total liabilities and equity
$ 400,000 14,100,000 100,000 (1,500,000) $13,100,000
Nouveau’s reorganization value is calculated as follows: Excess cash Present value of future operating cash flows of emerging entity Total
$ 200,000 10,300,000 $10,500,000
Creditors represented by the liabilities subject to compromise will receive an immediate cash payment of $200,000, new long-term debt securities of $9,850,000, and 70% of the new common stock. The old shareholders will receive 30% of the new common stock. The market value of the receivables is $700,000, the market value of the inventories is $1,500,000 and the market value of the plant and equipment is $8,000,000. There are no previously unreported identifiable intangible assets. Required a. Show why this reorganization plan meets the fresh start reporting criteria. b. Calculate the total value of the new common stock. c. Prepare the journal entries to record the restructuring. d. Present the balance sheet of the new organization immediately after the reorganization. ANS: a. b.
$10,500,000 < $400,000 + $14,100,000, and the old shareholders receive less than 50% of the new shares. $10,300,000 - $400,000 - $9,850,000 = $50,000
©Cambridge Business Publishers, 2023 15-64
Advanced Accounting, 5th Edition
c. Liabilities subject to compromise
14,100,000 Cash Long-term debt Common stock Gain on discharge of debt
Common stock (old)
200,000 9,850,000 35,000 4,015,000 100,000
Common stock (new) Additional paid-in capital Loss on revaluation
15,000 85,000 2,600,000
Accounts receivable Inventories Plant and equipment
100,000 500,000 2,000,000
Gain on discharge of debt Additional paid-in capital
4,015,000 85,000 Loss on revaluation Retained earnings
2,600,000 1,500,000
d. Cash Accounts receivable Inventories Plant and equipment Total assets
100,000 700,000 1,500,000 8,000,000 $10,300,000
Postpetition liabilities Long-term debt Common stock Total liabilities and equity
$
Test Bank, Chapter 15
$
400,000 9,850,000 50,000 $10,300,000
©Cambridge Business Publishers, 2023 15-65
27.
Topic: Fresh start reporting LO 4 Baltimore Company is emerging from Chapter 11 reorganization. Its balance sheet at the end of the reorganization period is as follows: Assets Current assets Property and equipment
Total assets
Liabilities and equity $ 200,000 Current liabilities (postpetition) 3,600,000 Liabilities subject to compromise Common stock _______ Retained deficit $3,800,000 Total liabilities and equity
$ 300,000 3,900,000 100,000 (500,000) $3,800,000
Additional information: 1. Liabilities subject to compromise consist of a $1,500,000 loan payable and a $2,400,000 note payable. 2. Reorganization value is $2,800,000. 3. As part of the reorganization plan, the loan is exchanged for a new loan in the amount of $820,000 plus 35% of the new stock issued. The note is exchanged for a new note in the amount of $1,600,000 plus 35% of the new stock issued. The existing common stock is canceled; the old shareholders receive 30 percent of the new stock. 4. Fair values of reported assets are: current assets, $150,000; property and equipment, $2,050,000. In addition, there are previously unreported identifiable intangible assets valued at $100,000. Required a. Explain why this reorganization qualifies for fresh start reporting. b. Calculate the total value of the new common stock. c. Prepare journal entries to record the reorganization plan. d. Present Baltimore Company’s balance sheet immediately following emergence from reorganization. ANS: a. The company meets the two conditions for fresh start reporting. 1. Reorganization value of the entity’s assets ($2,800,000) is less than the total of postpetition liabilities ($300,000) plus allowed claims ($3,900,000), and 2. Holders of existing voting shares receive 30% of the voting shares in the new entity, which is less than 50%. b. Current liabilities (postpetition) Loan payable (new) Note payable (new) Common stock Reorganization value
$ 300,000 820,000 1,600,000 80,000 $2,800,000
Reorganization value less total liabilities equals the value of common stock.
©Cambridge Business Publishers, 2023 15-66
Advanced Accounting, 5th Edition
c. Discharge debt: Liabilities subject to compromise Loan payable (new) Note payable (new) Common stock (70% x $80,000) Gain on discharge of debt To record settlement of prepetition liabilities.
3,900,000 820,000 1,600,000 56,000 1,424,000
Restructure prior shareholders’ interests: Common stock (old) Common stock (new) (30% x $80,000) Additional paid-in capital To record creation of new equity interests.
100,000 24,000 76,000
Revalue assets: Loss on revaluation Goodwill (1) Identifiable intangibles Current assets Property and equipment (1) $2,800,000 - $150,000 - $2,050,000 - $100,000 = $500,000. Close gains and losses and eliminate the retained deficit: Gain on discharge of debt Additional paid-in capital Loss on revaluation Retained deficit To close gains and losses and eliminate the retained deficit.
1,000,000 500,000 100,000 50,000 1,550,000
1,424,000 76,000 1,000,000 500,000
d.
Assets Current assets Property and equipment Identifiable intangibles Goodwill Total assets
Test Bank, Chapter 15
Baltimore Company Balance Sheet Following Reorganization Liabilities and equity $ 150,000 Current liabilities 2,050,000 Notes payable 100,000 Loans payable 500,000 Common stock $2,800,000 Total liabilities and equity
$ 300,000 820,000 1,600,000 80,000 $2,800,000
©Cambridge Business Publishers, 2023 15-67
28.
Topic: Fresh start reporting LO 4 Esperer Company is emerging from Chapter 11 reorganization and qualifies for fresh start reporting. Information on the reorganization is as follows: 1. 2.
Postpetition liabilities are $650,000. The liabilities subject to compromise are replaced with $6,200,000 in notes payable and 80% of the new common stock issued. Reorganization value is $7,000,000. Fair value of previously reported identifiable assets are current assets, $350,000 and buildings and equipment, $6,000,000. Previously unreported intangible assets have a fair value of $100,000. The gain on discharge of debt is $1,800,000. The old common stock account had a balance of $400,000. Current assets were written down by $100,000, and property and equipment was written down by $2,500,000.
3. 4. 5. 6.
Required a. Prepare Esperer’s balance sheet immediately following reorganization. b. Reconstruct the journal entries to record the reorganization plan. c. Prepare Esperer’s balance sheet immediately prior to reorganization. ANS: a.
Assets Current assets Property and equipment Identifiable intangibles Goodwill Total assets
Esperer Company Balance Sheet Following Reorganization Liabilities and equity $ 350,000 Postpetition liabilities 6,000,000 Notes payable 100,000 Common stock 550,000 $7,000,000 Total liabilities and equity
$ 650,000 6,200,000 150,000 ________ $7,000,000
Goodwill = $7,000,000 - $350,000 - $6,000,000 - $100,000 = $550,000. Common stock = $7,000,000 - $650,000 - $6,200,000 = $150,000. b. Discharge debt: Liabilities subject to compromise Note payable (new) Common stock (80% x $150,000) Gain on discharge of debt To record settlement of prepetition liabilities. $8,120,000 = $6,200,000 + $120,000 + $1,800,000. Restructure prior shareholders’ interests: Common stock (old) Common stock (new) (20% x $150,000) Additional paid-in capital To record creation of new equity interests. ©Cambridge Business Publishers, 2023 15-68
8,120,000 6,200,000 120,000 1,800,000
400,000 30,000 370,000
Advanced Accounting, 5th Edition
Revalue assets: Loss on revaluation Goodwill Identifiable intangibles Current assets Property and equipment To revalue assets.
1,950,000 550,000 100,000 100,000 2,500,000
Close gains and losses and eliminate the retained deficit: Gain on discharge of debt Additional paid-in capital Loss on revaluation Retained deficit To close gains and losses and eliminate the retained deficit.
1,800,000 370,000 1,950,000 220,000
c.
Assets Current assets Property and equipment
Total assets 29.
Esperer Company Balance Sheet Immediately Prior to Reorganization Liabilities and equity $ 450,000 Postpetition liabilities 8,500,000 Notes payable Common stock _______ Retained deficit $8,950,000 Total liabilities and equity
$ 650,000 8,120,000 400,000 (220,000) $8,950,000
Topic: Quasi-reorganization LO 5 Dresser Industries' balance sheet is as follows: Assets Cash Receivables Merchandise Property, net Total
$ 100,000 500,000 800,000 2,000,000 ________ $3,400,000
Liabilities and Equity Accounts payable Long-term liabilities Common stock, $2 par Additional paid-in capital Retained deficit Total
$ 700,000 1,500,000 1,000,000 800,000 (600,000) $3,400,000
The company enters into a quasi-reorganization, and takes the following steps: 1.
Assets are written down to fair value as follows: Fair Value Receivables $ 450,000 Merchandise 500,000 Property 1,400,000
2.
The par value of the common stock is reduced to $0.50/share.
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-69
Required a. Prepare the journal entries necessary to accomplish the quasi-reorganization. b. Present the balance sheet immediately following the quasi-reorganization. ANS: a. Retained deficit
950,000 Receivables Merchandise Property
50,000 300,000 600,000
Common stock, $2 par
1,000,000 Common stock, $0.50 par Additional paid-in capital
Additional paid-in capital
250,000 750,000 1,550,000
Retained deficit
1,550,000
b. Assets Cash Receivables Merchandise Property (net) Total 30.
$ 100,000 450,000 500,000 1,400,000 $2,450,000
Liabilities and Equity Accounts payable Long-term liabilities Common stock, $1 par Retained earnings (dated) Total
$ 700,000 1,500,000 250,000 0 $2,450,000
Topic: Quasi-reorganization LO 5 Riorden Corporation’s balance sheet is as follows: Assets Cash Receivables Merchandise Prepaid expenses Plant and equipment Intangible assets Total
$
25,000 200,000 500,000 50,000 2,500,000 150,000 $3,425,000
Liabilities and Equity Accounts payable Loans payable Common stock, $5 par Additional paid-in capital Retained deficit Total
$ 400,000 2,000,000 500,000 1,200,000 ( 675,000) ________ $3,425,000
The company enters into a quasi-reorganization with the goal of starting with a zero balance in retained earnings. The fair values of its reported assets are as follows:
Receivables Merchandise Prepaid expenses Plant and equipment Intangible assets
©Cambridge Business Publishers, 2023 15-70
Fair Value $ 200,000 450,000 50,000 2,000,000 0
Advanced Accounting, 5th Edition
Required a. Riorden’s par value will need to be adjusted to accomplish the quasi-reorganization. What par value per share is necessary? b. Present Riorden’s balance sheet immediately following the quasi-reorganization. ANS: a.
After the asset write-downs, the retained earnings deficit is: Retained deficit prior to quasi-reorganization Loss on merchandise write-down Loss on plant and equipment write-down Intangible assets write-off Retained deficit
$ (675,000) (50,000) (500,000) (150,000) $(1,375,000)
Additional paid-in capital must total $1,375,000 in order to absorb this deficit. Its current balance is $1,200,000. To increase additional paid-in capital by $175,000, the total par value of the common stock must be $325,000. There are 100,000 shares (= $500,000/$5). Therefore, the new par value must be $325,000/100,000 = $3.25/share. b. Assets Cash Receivables Merchandise Prepaid expenses Plant and equipment Total 31.
$
25,000 200,000 450,000 50,000 2,000,000 $2,725,000
Liabilities and equity Accounts payable Loans payable Common stock, $3.25 par Retained earnings (dated) Total
$ 400,000 2,000,000 325,000 0 ________ $2,725,000
Topic: Troubled debt restructuring LO 5 Tap Company owes a bank $1,000,000, which is currently due, but the company cannot make the payment. The bank agrees to accept the following in complete settlement of the liability: Tap has an investment in debt securities, classified as held-to-maturity and carried at a cost of $450,000. Tap agrees to transfer the securities to the bank. Current market value of the securities is $475,000. Tap will issue 10,000 shares of common stock (par value $0.10/share, market value $35/share) to the bank. Required Make the entry or entries necessary to record the settlement on Tap’s books.
Test Bank, Chapter 15
©Cambridge Business Publishers, 2023 15-71
ANS: Investment in debt securities
25,000
Gain on asset disposition To revalue the investment to fair value.
25,000
Loan payable
1,000,000 Investment in debt securities Common stock Additional paid-in capital Gain on restructuring
475,000 1,000 349,000 175,000
To record the restructuring. 32.
Topic: Troubled debt restructuring LO 5 Luchando Company has a loan with a principal balance of $800,000, which is currently due. Luchando is experiencing financial difficulties and can’t make the payment. The bank agrees to accept the following in full payment of the loan: • • •
Cash of $100,000 Merchandise (book value $400,000, fair value $340,000) Equipment (book value $250,000, fair value $270,000)
Required Make the appropriate entry or entries necessary to record the settlement of the debt on Luchando’s books. ANS: Equipment Loss on asset disposition
20,000 40,000
Merchandise To revalue the equipment and merchandise to fair value. Loan payable
60,000
800,000 Cash Merchandise Equipment Gain on restructuring
100,000 340,000 270,000 90,000
To record the restructuring.
©Cambridge Business Publishers, 2023 15-72
Advanced Accounting, 5th Edition
33.
Topic: Troubled debt restructuring LO 5 On January 1, 2022, a company borrowed $277,510, with payment of $100,000 to be made at the end of each of the next three years, starting December 31, 2022. At December 31, 2022, the company has made one payment but is experiencing financial difficulties and renegotiates the terms of the loan. The creditor grants a concession by changing the annual payments to $95,722 per year for the remaining two years of the loan. Required a. What is the interest rate on the original loan? b. What is the carrying value of the loan at December 31, 2022? c. Will the company report a gain on restructuring due to the change in interest rate on the loan? Explain. d. What is the new effective interest rate on the loan? e. Prepare the journal entry to record the $95,722 payment on December 31, 2023 and December 31, 2024. ANS: a.
b.
The original loan carries an interest rate of 4%. $277,510/$100,000 = 2.7751, which is the present value of an annuity of 1 per year for 3 years, at 4%. The carrying amount of the loan at December 31, 2022, is $188,610. Date Principal payment Interest payment (4%) January 1, 2022 December 31, 2022 $88,900 $11,100
Balance $277,510 188,610
c.
No. The sum of the undiscounted future payments is $191,444 (= $95,722 x 2), which is greater than the carrying value of the loan ($188,610).
d.
The renegotiated loan carries an interest rate of 1%. $188,610/$95,722 = 1.9704, which is the present value of an annuity of 1 per year for 2 years, at 1%.
e.
December 31, 2023 Interest expense (1% x $188,610) Loan payable Cash To record payment at December 31, 2023. December 31, 2024 Interest expense (1% x $188,610 - $93,836) Loan payable Cash To record payment at December 31, 2024.
Test Bank, Chapter 15
1,886 93,836 95,722
948 94,774 95,722
©Cambridge Business Publishers, 2023 15-73
34.
Topic: Troubled debt restructuring LO 5 On January 1, 2023, Franklin Company has a 6% bank loan with principal of $1,000,000 and accrued interest of $30,000. The loan plus interest is currently due. Franklin cannot make the required payment, and the bank agrees to restructure the loan to improve collectability. The bank modifies the terms as follows: cancel $230,000 of the total debt owed, extend the due date for the remaining debt for 2 years, to December 31, 2024, and reduce the interest rate to 2%, with interest to be paid annually on December 31, 2023 and December 31, 2024. Required The transaction qualifies as a troubled debt restructuring. Prepare the entries needed on Franklin's books to: a. Record the restructuring on January 1, 2023. b. Make the interest payment on December 31, 2023. c. Make the interest and principal payment on December 31, 2024. ANS: a. Total payments = $800,000 + [2 x (0.02 x $800,000)] = $832,000, which is less than the carrying value of the debt ($1,030,000), so the restructured debt is recorded as the sum of the undiscounted future payments, and the difference is recorded as a gain on restructuring. January 1, 2020 Loan payable Interest payable
1,000,000 30,000 Restructured debt Gain on restructuring
832,000 198,000
To record the restructuring. b. December 31, 2023 Restructured debt
16,000 Cash
16,000
To record the interest payment. c. December 31, 2024 Restructured debt Cash To record the interest and principal payment.
©Cambridge Business Publishers, 2023 15-74
816,000 816,000
Advanced Accounting, 5th Edition
35.
Topic: Troubled debt restructuring LO 5 Ideal Industries borrowed $600,000 on January 1, 2023 from its local bank. The loan carries a 5% interest rate, payable at the end of each year for five years, with the loan principal due on December 31, 2027. Ideal makes the interest payments in full on December 31, 2023 and 2024. However, due to a global economic downturn, it concludes that it does not have sufficient resources to continue servicing the debt under the original terms. The bank offers to forgive $96,000 of the loan principal, but continue the 5% annual interest payments for the remainder of the loan term. The renegotiation qualifies as a troubled debt restructuring. Required a. Does Ideal record a gain on restructuring on December 31, 2024? Explain. b. Prepare the entry, if any, to record the restructuring on December 31, 2024, and the interest payment on December 31, 2025. c. Prepare the entry to record the interest and principal payment on December 31, 2027. d. Now assume the bank offers to reduce the interest rate on the loan to 2%, but maintains the principal of the loan at $600,000. Repeat the requirements of a, b, and c. ANS: a. A gain is recognized because the sum of the renegotiated payments is less than the carrying amount of the loan; 3 x (5% x $504,000)+ $504,000 = $579,600 < $600,000. b. December 31, 2024 Loan payable Gain on restructuring To record restructuring; $20,400 = $600,000 - $579,600. December 31, 2025 Loan payable (5% x $504,000) Cash To record payment of interest.
20,400 20,400
25,200 25,200
c. December 31, 2027 Loan payable 529,200 Cash To record payment of principal and interest; $529,200 = $25,200 + $504,000. d.
529,200
There is no gain because 3 x ($600,000 x 2%) + $600,000 > $600,000. December 31, 2025 Interest expense (2% x $600,000) Cash
12,000
December 31, 2027 Loan payable Interest expense Cash
600,000 12,000
Test Bank, Chapter 15
12,000
612,000 ©Cambridge Business Publishers, 2023 15-75
TEST BANK CHAPTER 16 The SEC and Financial Reporting MULTIPLE CHOICE 1.
Topic: Mission of the SEC LO 1 Which one of the following statements best describes the principal mission of the SEC? a. b.
2.
3.
4.
c. d.
To ensure the profitability and safety of investments offered to the public. To promulgate accounting and auditing standards that fairly measure company performance. To ensure that securities markets function fairly and honestly. To maintain a database useful in securities research.
ANS:
c
Topic: Securities legislation LO 1 The Securities Act of 1933: a. b. c. d.
Requires government monitoring of auditing firms. Regulates the public offering of securities. Regulates investment companies. Established the Securities and Exchange Commission.
ANS:
b
Topic: Securities legislation LO 1 Regulations for trading in securities in secondary markets are found in the: a. b. c. d.
Securities Act of 1933. Securities Act of 1934. Investment Company Act of 1940. Trust Indenture Act of 1940.
ANS:
b
Topic: Securities legislation LO 1 Which legislation authorizes the government to establish accounting and disclosure requirements for publicly-owned companies? a. b. c. d.
Sarbanes-Oxley Act Securities Investor Protection Act Securities Act of 1933. Securities Act of 1934.
ANS:
d
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-1
5.
6.
7.
8.
Topic: Securities legislation LO 1 The Public Utility Holding Company Act of 1935 requires public utility holding companies to: a. b. c. d.
Equitably distribute voting power among their investors. Issue only common stock to the public. Pay fees to the SEC as a percentage of income. Set rates based on documented costs and supply and demand.
ANS:
a
Topic: Securities legislation LO 1 The Trust Indenture Act of 1939 provides regulations for the issuance of a. b. c. d.
Bonds. Preferred stock. Stock by dealers. Derivative instruments.
ANS:
a
Topic: Securities legislation LO 1 The Investment Company Act of 1940 regulates the activities of: a. b. c. d.
Credit unions. Mutual funds. Insurance companies. Financial planning services.
ANS:
b
Topic: Securities legislation LO 1 The Investment Advisers Act of 1940 prohibits investment advisers from: a. b. c. d.
Setting advisement fees as a percentage of client stock transactions. Offering advice on government debt securities. Sharing in the gains in their clients’ portfolios. Providing stock rankings based on personal preferences.
ANS:
c
©Cambridge Business Publishers, 2023 16-2
Advanced Accounting,5th Edition
9.
10.
11.
12.
Topic: Securities legislation LO 1 The Securities Investor Protection Corporation (SIPC): a. b. c. d.
Guarantees the minimum value of securities investments held in brokerage accounts. Insures the value of checking and savings accounts held in banks. Insures cash held in customer accounts held by brokers. Allows customers to sue brokers providing advice that leads to investment losses.
ANS:
c
Topic: Securities legislation LO 1 The Foreign Corrupt Practices Act of 1977 includes all of these provisions except: a. b. c. d.
Penalties for violating insider trading rules were increased. Provisions to prevent companies from making illegal payments. Companies must maintain accurate accounting records. Companies must maintain a system of effective internal accounting controls.
ANS:
a
Topic: Securities legislation LO 1 The Insider Trading Sanctions Act of 1984 allows the SEC to assess fines for inappropriate use of nonpublic information in amounts up to a. b. c. d.
Double the amount of illegal gains. $5 million. $2 million or twice the amount of illegal gains. $1 million or three times the amount of illegal gains.
ANS:
d
Topic: Securities legislation LO 1 The Private Securities Litigation Reform Act of 1995: a. b. c. d.
Outlines the rights of bondholders and provides for the appointment of an independent trustee to represent their rights. Regulates open-end mutual funds and closed-end investment companies. Shields registrants from lawsuits concerning forward-looking financial information. Increased penalties for violating insider trading rules.
ANS:
c
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-3
13.
14.
15.
16.
Topic: Securities legislation LO 1 The Emergency Economic Stabilization Act of 2008: a. b. c. d.
Allowed the government to bail out banks and other organizations. Temporarily banned short sales. Provided investors with insurance against credit crisis investment losses. Suspended fair value accounting for investments.
ANS:
a
Topic: Securities legislation LO 1 The Dodd-Frank Act of 2010 expanded the SEC’s role in monitoring: a. b. c. d.
The issuance of debt securities. Financial services markets. Accounting standards. Auditing firms.
ANS:
b
Topic: Securities legislation LO 1 The Jumpstart Our Business Startups Act of 2012 (JOBS) facilitates capital formation by emerging growth companies by: a. b. c. d.
Providing funding for qualifying projects. Providing a safe harbor for pro forma information. Exempting them from certain SEC reporting requirements. Guaranteeing a minimum securities value for their investors.
ANS:
c
Topic: PCAOB LO 1 What is the primary mission of the PCAOB? a. b. c. d.
Identify and prosecute those who manipulate accounting earnings. Establish audit standards and monitor auditing firms. Develop generally accepted accounting principles for public companies. Develop the regulations that publicly traded companies must follow.
ANS:
b
©Cambridge Business Publishers, 2023 16-4
Advanced Accounting,5th Edition
17.
18.
19.
20.
Topic: Definition of a security LO 1 Securities issued by all of the following organizations are exempt from the registration requirements of the 1933 Securities Act except: a. b. c. d.
Not-for-profit organizations. State and local governments. Banks. Investment companies.
ANS:
d
Topic: Definition of a security LO 1 Which of the following is exempt from the reporting provisions of the 1934 Securities Act? a. b. c. d.
Securities issued by not-for-profit organizations. Securities issued by governments. Securities issued by banks. Securities issued by savings and loan associations.
ANS:
b
Topic: Definition of a security LO 1 Which of the following is not exempt from the reporting provisions of the 1934 Securities Act? a. b. c. d.
Short-term notes issued for working capital purposes. Securities issued by not-for-profit organizations. Securities issued by a state government. Securities issued by a local government.
ANS:
b
Topic: Organization of the SEC LO 2 The SEC is organized into several divisions, including all of the following except: a. b. c. d.
Division of Investment Management. Division for Risk and Quantitative Analysis Division of Enforcement. Division of Trading and Markets.
ANS:
b
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-5
21.
22.
23.
24.
Topic: Organization of the SEC LO 2 The SEC division most frequently encountered by accountants is the: a. b. c. d.
Division of Corporation Finance. Division of Enforcement. Division of Trading and Markets. Division of Investment Management.
ANS:
a
Topic: Organization of the SEC LO 2 The Division of Corporation Finance primarily: a. b. c. d.
Monitors trading activity to identify instances of fraud. Administers insider trading sanctions. Administers the disclosure requirements of the securities laws. Sets standards for audits and auditors.
ANS:
c
Topic: Organization of the SEC LO 2 Which Division of the SEC may require restatements of filed financial reports? a. b. c. d.
Division of Enforcement Division of Investment Management Division of Fraud Analysis Division of Corporation Finance
ANS:
d
Topic: Organization of the SEC LO 2 The Division of Trading and Markets monitors: a. b. c. d.
Secondary securities markets. Issuance of new securities. Mutual funds and investment companies. Brokers.
ANS:
a
©Cambridge Business Publishers, 2023 16-6
Advanced Accounting,5th Edition
25.
26.
27.
28.
Topic: Organization of the SEC LO 2 A Wells notice is issued a. b. c. d.
To warn a company of civil action for violations of securities laws. When a company’s accounting methods are questioned. When a company’s management is accused of criminal activity. When a company has settled its issues with the SEC.
ANS:
a
Topic: Organization of the SEC LO 2 The Chief Accountant of the SEC does all of the following except: a. b. c. d.
Advises the SEC on accounting principles, auditing standards, and financial disclosures. Is the liaison between the SEC and the accounting profession. Serves as one of the five commissioners of the SEC. Conducts investigations of questionable accounting practices.
ANS:
c
Topic: Organization of the SEC LO 2 The Division of Economic and Risk Analysis provides support to a. b. c. d.
The Division of Corporation Finance. The Chief Accountant. The Division of Enforcement. All SEC activities.
ANS:
d
Topic: Organization of the SEC LO 2 The Division of Economic and Risk Analysis uses Corporate Issuer Risk Assessment to identify a. b. c. d.
Potential criminal activity by management. Potential earnings management. Companies with unusual exposure to marketplace risk. Companies with incomplete SEC filings.
ANS:
b
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-7
29.
30.
31.
Topic: Organization of the SEC LO 2 The Financial Reporting and Audit Group (FRAud Group) is charged with developing techniques to identify potential accounting fraud. Which SEC division created the FRAud Group? a. b. c. d.
Division of Corporation Finance Division of Enforcement Division of Trading and Markets Division of Investment Management
ANS:
b
Topic: SEC pronouncements on accounting and auditing LO 2 The highest-ranking authoritative source of accounting principles for publicly held companies is: a. b. c. d.
Accounting and Auditing Enforcement Releases Financial Reporting Releases Accounting Series Releases Staff Accounting Bulletins
ANS:
b
Topic: SEC pronouncements on accounting and auditing LO 2 Which SEC publications are similar to FASB Technical Bulletins? a. b. c. d.
Financial Reporting Releases Staff Accounting Bulletins Accounting and Auditing Enforcement Releases Interpretive Letters
ANS: b 32.
Topic: Registration of new securities LO 3 When the information provided to the SEC for a new security issue meets SEC requirements, this means that: a. b.
d.
Financial information has been audited and given a clean audit opinion. The company’s governance structure provides adequate internal controls over the financial information provided. Independence requirements for the CEO, board of directors, and the audit committee have been met. SEC disclosure requirements have been satisfied.
ANS:
d
c.
©Cambridge Business Publishers, 2023 16-8
Advanced Accounting,5th Edition
33.
34.
35.
36.
Topic: Registration of new securities LO 3 A prospective issuer of new securities must initially file a registration statement with the SEC that includes all of the following items except: a. b. c. d.
Summary of operations for the past five years. Audited balance sheets as of the end of the last two years. Audited statements of income and comprehensive income for the past three years. Audited statements of changes in shareholders’ equity for the past two years.
ANS:
d
Topic: Registration of new securities LO 3 In a registration statement, a comfort letter provides negative assurance regarding: a. b. c. d.
The issuing company’s internal controls. Audited financial statement information. Management’s responsibility for the accuracy of the financial statements. Unaudited financial statement information included in the registration statement.
ANS:
d
Topic: Registration of new securities LO 3 In a registration statement, a comfort letter is provided by: a. b. c. d.
Top management. An independent CPA. The underwriter. Division of Corporation Finance staff.
ANS:
b
Topic: Registration of new securities LO 3 The basic SEC form used for the registration of new security issues is: a. b. c. d.
Form S-1 Form S-K Form 8-K Form S-4
ANS:
a
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-9
37.
38.
Topic: Registration of new securities LO 3 The SEC form used for issuance of securities in business acquisitions is: a. b. c. d.
Form S-1 Form S-K Form 8-K Form S-4
ANS:
d
Topic: Registration of new securities LO 3 When a company goes through the process of issuing new securities, the stub period is: a. b. c. d.
The time a new registrant must wait before hearing whether the SEC approves their registration statement. The period of time from the last audited financial statement to the date of the most recent interim period prior to issuance of the registration statement. The interim period ending just prior to issuance of the registration statement. The time it takes the Division of Enforcement to evaluate the financial information in the registration statement for signs of potential fraud or misleading information.
ANS: b 39.
Topic: Registration of new securities LO 3 During the quiet period between the time a company files the registration statement for the issue of new securities and the time the SEC approves it, a company cannot: a. b. c. d.
Issue audited interim financial statements. Change auditors unless no disagreements exist between the current auditor and management. Borrow on a short or long-term basis from banks or other lending organizations. Release information to the public promoting the sale of its securities.
ANS: d 40.
Topic: Registration of new securities LO 3 Which of the following issues of new securities by public companies are exempted from the SEC’s detailed registration requirements? a. b. c. d.
Debt securities. Securities issued by small companies. Securities issued to institutional investors. Preferred stock issues.
ANS: c
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Advanced Accounting,5th Edition
41.
42.
43.
44.
Topic: Registration of new securities LO 3 In which type of underwriting does the company issuing new shares bear none of the risk that the market will not buy its stock at the asking price? a. b. c. d.
All-or-none underwriting Best efforts underwriting Firm commitment underwriting Over-the-counter underwriting
ANS:
c
Topic: Registration of new securities LO 3 In which type of underwriting does the company issuing new shares bear all of the risk that the market will not buy its stock at the asking price? a. b. c. d.
All-or-none underwriting Best efforts underwriting Firm commitment underwriting Over-the-counter underwriting
ANS:
b
Topic: Registration of new securities LO 3 Which type of underwriting arrangement relieves the issuing company of the risk that not enough capital will be raised to finance its intended projects? a. b. c. d.
All-or-none underwriting Best efforts underwriting Firm commitment underwriting Over-the-counter underwriting
ANS:
a
Topic: Registration of new securities LO 3 A benefit of using a direct listing to sell new securities to the public is that a. b. c. d.
Underwriting fees are more predictable. Costs of filing a registration statement are avoided. The company benefits from initial price increases. The offering is generally approved in a shorter amount of time.
ANS:
c
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-11
45.
46.
Topic: Registration of new securities LO 3 Which statement is false concerning the prospectus? a. b. c. d.
It must be given to each stock purchaser. It includes information on the expected use of stock proceeds. It includes a description of business risks. It includes a statement of approval from the SEC.
ANS:
d
Topic: Form 10-K LO 4 Which statement regarding the structure, content, and filing requirements of Form 10-K is incorrect? a. b. c. d. ANS:
47.
Information regarding executive compensation, related party transactions, and security ownership is provided. A description of the business, properties owned and legal proceedings involving the company is presented. A company's 10-K report must be filed with the SEC within 90 days of the end of the registrant's fiscal year, unless the company is a large or accelerated filer. The “risk factors” section describes actual events that have adversely affected the company’s financial health. d
Topic: Periodic reporting requirements LO 4 Regulations S-X and S-K provide the rules for different aspects of periodic filings. Which statement below is true? a. b. c. d.
ANS:
Regulation S-X governs the content of the 10-K, while Regulation S-K governs the content of all other periodic filings. Regulation S-K governs the content of the 10-K, while Regulation S-X governs the content of all other periodic filings. Regulation S-X governs the financial statements and supplementary financial information in periodic filings, while Regulation S-K governs all other items in periodic filings. Regulation S-K governs the financial statements and supplementary financial information in periodic filings, while Regulation S-X governs all other items in periodic filings. c
©Cambridge Business Publishers, 2023 16-12
Advanced Accounting,5th Edition
48.
Topic: Regulation S-X LO 4 Which statement is false concerning Regulation S-X? a. b.
49.
50.
c. d.
Regulation S-X prescribes the accounting principles to be used in 10-K and 10-Q reports. Regulation S-X does not cover reporting requirements for disclosures other than financial information in periodic filings. Regulation S-X prescribes reporting requirements for Form S-1. Regulation S-X governs Item 8 in the list of Form 10-K requirements.
ANS:
c
Topic: EDGAR LO 4 Which of the following statements concerning the SEC's EDGAR system is false? a. b. c. d.
EDGAR allows users to electronically search for filing information. Most documents filed with EDGAR are available in multiple formats. Documents filed with EDGAR only include nonfinancial information. Documents filed with EDGAR include Form 10-K and Form 10-Q.
ANS:
c
Topic: Form 10-K LO 4 Which of the following is not a specifically required item in Form 10-K? a. b. c. d.
51.
Related-party transactions Risk factors Disagreements with accountants on accounting disclosures Dividend policy
ANS: d Topic: Form 10-K LO 4 What is Item 7 in Form 10-K? a. b. c. d.
Discussion of risk factors. Financial statements and supplementary information. Quantitative and qualitative disclosures about market risk. Management’s discussion and analysis of financial condition and results of operations.
ANS:
d
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-13
52.
53.
54.
55.
Topic: Form 10-K LO 4 What is Item 8 in Form 10-K? a. b. c. d.
Discussion of risk factors. Financial statements and supplementary information. Quantitative and qualitative disclosures about market risk. Management’s discussion and analysis of financial condition and results of operations.
ANS:
b
Topic: Form 10-K LO 4 What is Item 1A in Form 10-K? a. b. c. d.
Discussion of risk factors. Financial statements and supplementary information. Quantitative and qualitative disclosures about market risk. Management’s discussion and analysis of financial condition and results of operations.
ANS:
a
Topic: Form 10-K LO 4 What is Item 7A in Form 10-K? a. b. c. d.
Discussion of risk factors. Financial statements and supplementary information. Quantitative and qualitative disclosures about market risk. Management’s discussion and analysis of financial condition and results of operations.
ANS:
c
Topic: Periodic reporting requirements LO 4 Filing deadlines for Forms 10-K and 10-Q differ depending on: a. b. c. d.
The market capitalization of the filer. The industry in which the filer operates. How long the filer’s securities have been listed in the U.S. The market(s) on which the filer’s securities are traded.
ANS:
a
©Cambridge Business Publishers, 2023 16-14
Advanced Accounting,5th Edition
56.
57.
58.
59.
Topic: Form 10-K LO 4 All of the following are official item categories of Form 10-K except: a. b. c. d.
Changes in audit firm and disagreements with audit firms. Executive officers. Description of properties. Unresolved staff comments.
ANS:
b
Topic: Form 10-K LO 4 Off-balance-sheet arrangements are included in which category of Form 10-K? a. b. c. d.
Risk factors. Legal proceedings. Disclosures about market risk. MD&A.
ANS:
d
Topic: Form 10-K LO 4 Key areas of company performance discussed in management’s discussion and analysis (Item 7) include all of the following except: a. b. c. d.
Critical accounting estimates. Liquidity and capital resources. Prospective information on future events likely to materially impact the company. Executive compensation.
ANS:
d
Topic: Form 10-K LO 4 Item 7A (Quantitative and Qualitative Disclosures about Market Risk) in Form 10-K requires registrants to group their investments in “market risk sensitive instruments” into these categories: a. b. c. d. ANS:
Current and noncurrent. Those acquired on formal markets and those acquired privately. Those entered into for trading purposes and those entered into for purposes other than trading. Those entered into for speculative purposes and those entered into as hedges of price risk. c
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-15
60.
61.
62.
63.
Topic: Form 10-K LO 4 Item 7A (Quantitative and Qualitative Disclosures about Market Risk) in Form 10-K requires registrants to present market risk information in any of these formats except: a. b. c. d.
Type of derivative investment. Tabular presentation. Sensitivity analysis. Value at risk.
ANS:
a
Topic: Form 10-K LO 4 Item 7A (Quantitative and Qualitative Disclosures about Market Risk) in Form 10-K gives companies the option of communicating their market risk by disclosing VaR. Which one of the following is an example of VaR? a. b. c. d.
Estimated potential losses if certain market risk factors change at least 5%. Expected cash flows by maturity date of financial instruments. Estimated maximum loss that will occur 95% of the time. Expected range of gains or losses occurring 95% of the time.
ANS:
c
Topic: Form 10-K LO 4 Which information below is most likely to be incorporated by reference in Form 10-K? a. b. c. d.
Controls and procedures. Audited financial statements and supplementary financial information. Security ownership. Changes in and disagreements with accountants.
ANS:
b
Topic: Form 10-K LO 4 Section 302 of the Sarbanes-Oxley Act requires a company’s CEO and CFO to certify that the annual and quarterly financial reports filed with the SEC: a. b. c. d.
Are prepared using generally accepted accounting principles. Have been audited by licensed and independent accountants and given a clean opinion. Fairly present the company’s results of operations and financial condition. Meet all SEC regulations regarding procedures for reporting financial information.
ANS:
c
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Advanced Accounting,5th Edition
64.
65.
66.
67.
Topic: Form 10-K LO 4 In Form 10-K, personal sworn statements must be made by the registrant’s CEO and CFO in all of these areas except: a. b. c. d.
Accuracy and completeness of financial statements. Effectiveness of financial reporting internal controls Deficiencies and changes to internal controls. Accuracy and completeness of MD&A.
ANS:
d
Topic: Form 10-K LO 4 Which statement is most accurate regarding the accounting standards required for financial statements of non-U.S. companies that file with the SEC? a. b. c. d.
The financial statements must be prepared using U.S. GAAP. The financial statements must be prepared using official IFRS. The financial statements must be prepared using either U.S. GAAP or official IFRS. The financial statements may be prepared using standards other than U.S. GAAP or official IFRS, with reconciliations of income and equity to U.S. GAAP.
ANS:
d
Topic: Form 10-K LO 4 What is the annual reporting form for non-U.S. companies whose stock is listed on U.S. exchanges? a. b. c. d.
Form 20-F Form 10-F Form 10-X Form 20-P
ANS:
a
Topic: Form 10-K LO 4 A listed company is domiciled in a country that uses a version of IFRS which differs from official IFRS. Which statement below is true concerning the financial statements presented in its Form 20-F? a. b. c. d.
It may file its financial statements as is, with reconciliations of income and shareholders’ equity to U.S. GAAP. It may file its financial statements without any adjustments. It must prepare its financial statements following U.S. GAAP. It must prepare its financial statements following official IFRS.
ANS:
a
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-17
68.
69.
70.
71.
Topic: Form 10-K LO 4 In their annual SEC filings, companies that have significant unconsolidated subsidiaries and equity method investees: a. b. c. d.
Are not required to provide separate financial information on these entities. Must provide complete balance sheets and income statements for these entities. Must provide separate financial information for these entities. Must explain why the entities are not consolidated and provide summarized income statement information for the entities.
ANS:
c
Topic: Accounting standards LO 4 Section 108 of the Sarbanes-Oxley Act authorizes the SEC to accept financial information on public companies prepared using accounting principles established by a. b. c. d.
Any standard-setting body that meets the Act’s requirements. The SEC or FASB. The FASB or IASB. The FASB, GASB, or IASB.
ANS:
a
Topic: Quarterly reports LO 4 Which of these statements concerning quarterly reports to the SEC is false? a. b. c. d.
Quarterly reports are typically much shorter than the annual report. The requirements of FASB ASC Topic 270, Interim Reporting, apply. A fourth quarter interim report is not required. Quarterly reports must be audited by a qualified accountant.
ANS:
d
Topic: Quarterly reports LO 4 Financial information required in quarterly reports filed with the SEC includes all of the following except: a. b.
d.
Balance sheets at the end of the quarter and the end of the prior fiscal year. Statement of income and comprehensive income for the current quarter and the same quarter of the prior year. Year-to-date statement of income and comprehensive income for the current quarter and the same quarter of the prior year. Statement of cash flows for the current quarter and the same quarter of the prior year.
ANS:
d
c.
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Advanced Accounting,5th Edition
72.
73.
74.
75.
Topic: Special reports LO 4 SEC registrants must file information on special events of significance to investors, such as changes in control or material impairments, using: a. b. c. d.
Form 10-K. Form S-3. Form 8-K. Form S-1.
ANS:
c
Topic: Special reports LO 4 SEC registrants must file information on special events of significance to investors, such as changes in control or material impairments: a. b. c. d.
On Form 10-Q. Within four days of occurrence. Only for specific types of events specified by Regulation S-X. On Form 10-K.
ANS:
b
Topic: Special reports LO 4 Events requiring registrants to file a Form 8-K include all of the following except: a. b. c. d.
A change in the independent certifying accountant. A change in control of the registrant. A change in the fiscal year. A change in accounting method.
ANS:
d
Topic: Form 8-K LO 4 When is Form 8-K required to include financial statements? a. b. c. d. ANS:
Form 8-K is always required to include pro forma financial statements reflecting the expected impact of the special event on the company’s financial performance. When there is a material modification in the rights of the company’s security holders, pro forma financial statements are required. When a company makes a major business acquisition. When there are material impairments of assets, financial statements reflecting the impairment losses are included. c
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-19
76.
77.
78.
79.
Topic: Periodic filings LO 4 If SEC staff are not satisfied with the information presented in a company’s 10-K or 10-Q, the company receives a: a. b. c. d.
Form 11-A. Form 9-D. Wells notice. Comment letter.
ANS:
d
Topic: Periodic filings LO 4 The top issue the SEC deals with when evaluating periodic filings is: a. b. c. d.
Fair value estimates. Non-GAAP performance measures. Off-balance-sheet arrangements. Use of hedge accounting.
ANS:
b
Topic: Corporate accountability and governance LO 5 The Sarbanes-Oxley Act requires the SEC to review the periodic filings of each registered company: a. b. c. d.
Every quarter. Every year. At least every two years. At least every three years.
ANS:
d
Topic: Corporate accountability and governance LO 5 Which legislation established the Public Company Accounting Oversight Board (PCAOB)? a. b. c. d.
Dodd-Frank Act Sarbanes-Oxley Act Economic Recovery and Stabilization Act Private Securities Litigation Reform Act
ANS:
b
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Advanced Accounting,5th Edition
80.
81.
82.
83.
Topic: Corporate accountability and governance LO 5 The Sarbanes-Oxley Act requires the PCAOB to conduct inspections of audits of a. b. c. d.
CPA firms that audit companies listed on U.S. exchanges. All CPA firms, regardless of whether the audited companies are listed on U.S. exchanges. CPA firms that audit large public companies listed on U.S. exchanges. U.S. CPA firms that audit companies listed on U.S. exchanges.
ANS:
a
Topic: Corporate accountability and governance LO 5 The PCAOB has historically had difficulty in obtaining audit information from CPA firms in a. b. c. d.
Brazil. China. Russia. Venezuela.
ANS:
b
Topic: Corporate accountability and governance LO 5 The Sarbanes-Oxley Act includes which one of these provisions? a. b. c. d.
Limits on types of services provided by CPA firms. A requirement that all public companies have internal audit departments. A requirement that the CEO serve on the audit committee. Restrictions on the types of non-audit services that CPA firms can provide to audit clients.
ANS:
d
Topic: Corporate accountability and governance LO 5 The Sarbanes-Oxley Act requires rotation of the lead engagement partner and concurring audit partner every five years to: a. b. c. d.
Increase competition among audit firms. Ensure that audit fees are competitive. Increase cooperation between audit personnel and company management. Increase auditor independence in evaluating financial information.
ANS:
d
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-21
84.
85.
Topic: Audit committee LO 5 The Sarbanes-Oxley Act provides for requirements with respect to which committee(s) of a company’s board of directors? a. b. c. d.
Nominating committee. Audit committee. Compensation committee and audit committee. Nominating committee and compensation committee.
ANS:
b
Topic: Audit committee LO 5 Which of these statements concerning audit committees is false? a. b. c. d. ANS:
86.
a
Topic: Corporate accountability and governance LO 5 The SEC requires certain investors to report their holdings and transactions in company stock. What category of investors is required to provide this information? a. b. c.
87.
The SEC requires registrants to have an audit committee. The Sarbanes-Oxley Act prohibits the CEO from serving on the audit committee. The audit committee is directly responsible for arrangements with and oversight of the external audit firm. The audit committee monitors the company’s financial accounting and reporting system.
d.
Management and employees of the company. Any investor holding more than 5% of company stock. Management, employees, and their immediate family owning more than 5% of company stock. Any investor owning more than 20% of company stock.
ANS:
b
Topic: Insider trading LO 5 Insider trading is: a. b. c. d.
Any trading in company securities by top management. Both a purchase and a sale of the same company’s securities by top management within a 6-month period. Trading activity that results in abnormal gains. Any trading in company securities based on information not available to the public.
ANS:
d
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Advanced Accounting,5th Edition
88.
89.
90.
91.
Topic: Proxy statements LO 5 Matters of shareholder action, communicated through proxy statements, include all of the following issues except: a. b. c. d.
Approval of change in the corporate charter or bylaws. Approval of the company’s business plan. Appointment of the independent auditor. Election of directors.
ANS:
b
Topic: The Dodd-Frank Act LO 5 The Dodd-Frank Act of 2010 provides for stronger regulation of: a. b. c. d.
Top management of public companies. Firms that audit public companies. The financial services industry. Firms that are “too big to fail.”
ANS:
c
Topic: The Dodd-Frank Act LO 5 The Volcker Rule: a. b. c. d.
Limits trading and service activities of banking entities. Protects “whistle blowers” who provide information about securities violations. Regulates derivatives markets. Regulates hedge funds.
ANS:
a
Topic: The Dodd-Frank Act LO 5 The Dodd-Frank Act established the following new regulatory organizations except: a. b. c. d.
The Financial Stability Oversight Council. The Bureau of Consumer Financial Protection. The Office of Credit Rating Agencies. The Center for Financial Risk Analysis.
ANS:
d
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-23
92.
93.
94.
Topic: Corporate accountability and governance LO 5 Which legislation provides monetary awards to those providing information on security violations? a. b. c. d.
Sarbanes-Oxley Act Securities Act of 1933. Dodd-Frank Act. Securities Investor Protection Act.
ANS:
c
Topic: Current reporting issues LO 6 Companies often report “non-GAAP” performance measures in their 10-K that exclude income items management feels are not useful to investors in predicting future performance. Which one of the following income items would be least likely to be omitted in determining a company’s non-GAAP income measure? a. b. c. d.
Depreciation and amortization. Restructuring expenses. Goodwill impairment loss. Cash compensation costs.
ANS:
d
Topic: Current reporting issues LO 6 Companies often report “non-GAAP” performance measures in their 10-K that exclude income items management feels are not useful to investors in predicting future performance. In which 10-K item category are these measures often reported? a. b. c. d.
Item 9A: Controls and procedures Item 7: MD&A Item 7A: Quantitative and qualitative disclosures about market risk Item 1A: Risk factors
ANS:
b
©Cambridge Business Publishers, 2023 16-24
Advanced Accounting,5th Edition
95.
Topic: Current reporting issues LO 6 Which statement below is false concerning cybersecurity governance and disclosures in SEC filings? a. b.
d.
Top management must actively oversee cybersecurity procedures. Companies must have procedures in place to accurately measure the impact of cybersecurity breaches. The SEC has had disclosure requirements for cybersecurity risks and breaches in place since 2019. A significant cybersecurity breach will result in a Form 8-K filing.
ANS:
c
c.
96.
Topic: Current reporting issues LO 6 A private company can become publicly listed by merging with an SPAC, rather than using a traditional IPO. Benefits of this approach include all of the following except: a. b. c. d. ANS:
97.
Periodic filing requirements after the merger are less stringent than for a traditional IPO. Investors have lower risk since they have the option to redeem their shares. The newly issued shares are more accurately valued due to the expertise of the SPAC sponsors. The merger between the SPAC and the private company can be completed in a shorter time period than a traditional IPO. a
Topic: Current reporting issues LO 6 Which statement is true concerning the SEC’s role regarding a company’s ESG activities? a.
d.
Controls and procedures are expected to be in place to provide accurate information to those responsible for ESG decisions within the company. CPAs have developed and certify the majority of ESG performance measures. The SEC requires disclosure of specific metrics that measure a company’s ESG performance. Companies must show significant progress in achieving their ESG goals.
ANS:
a
b. c.
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-25
PROBLEMS 1.
Topic: Securities legislation LO 1 Many of the federal securities laws administered by the SEC were the result of events that harmed investors and the economy. Required For each of the regulations below, briefly describe the events that motivated their enactment. a. b. c. d.
Securities Acts of 1933 and 1934 Foreign Corrupt Practices Act of 1977 Sarbanes-Oxley Act of 2002 Dodd-Frank Act of 2010
ANS: a.
The 1929 stock market crash dramatically affected the U.S. economy, not just the investment market. Much of the crisis was blamed on erroneous and inadequate information about company performance and the lack of accountability when this information was used for investment decisions and resulted in investor losses.
b.
In the 1970s, SEC investigations uncovered that U.S. companies routinely made payments to foreign government officials, politicians, and others with influence in other countries. Buying the support of these officials was viewed as a requirement to successful business operations in these countries. Benefits included more favorable taxes, easier access to markets, and higher sales. A major example was Lockheed’s use of bribes to secure aircraft sales to foreign governments. Although legal in many countries, these activities were viewed negatively by U.S. markets and led to their regulation and disclosure.
c.
Financial reporting scandals and corporate governance failures in the early 21st century led to the conclusion that the self-regulated accounting profession was not effective in identifying and disclosing issues or disciplining companies engaging in behavior not in the best interests of investors. The key example is Enron, although many other companies engaged in similar practices.
d.
The credit crisis of 2008 highlighted risky lending practices of banks and other financial institutions, and the lack of disclosure pertaining to loans and investments secured by these loans. A key example was Lehman Brothers, whose investment in subprime mortgage-backed securities led to its bankruptcy filing in 2008, with major effects on financial markets.
©Cambridge Business Publishers, 2023 16-26
Advanced Accounting,5th Edition
2.
Topic: Securities legislation LO 1 Regulation of U.S. financial markets is the purpose of the Securities Act of 1933 and the Securities Act of 1934. Required a. Each Act focuses on regulation of a different aspect of financial markets. What is the difference in focus between the two Acts? b. Briefly describe the major purposes of each Act. ANS:
3.
a.
The Securities Act of 1933 regulates initial offerings of securities in the U.S. financial markets. The Securities Act of 1934 regulates the secondary markets, where alreadyissued securities are traded.
b.
The Securities Act of 1933 prohibits the offering and sale of securities unless they are registered with the government and meet all relevant regulations, and prohibits fraudulent or deceptive practices in the offering of new securities. The Securities Act of 1934 established the SEC and authorizes the government to establish reporting and disclosure standards with the purpose of prohibiting deceptive practices in the purchase or sale of securities in the secondary markets.
Topic: Securities legislation LO 1 The Securities and Exchange Commission’s mission is to regulate the securities markets by requiring full disclosure of information and preventing fraudulent activities. However, it does not regulate registration and reporting for every type of financial security. Required a. Briefly describe the markets and securities that are regulated by the SEC. b. Name two examples of securities that are not subject to the SEC’s registration and periodic reporting rules. c. Name two examples of securities that are not subject to the SEC’s rules regarding registration of new securities, but are subject to the SEC’s periodic reporting requirements. ANS: a.
The SEC regulates securities offered to the public and traded in primary and secondary U.S. markets, such as the NYSE and NASDAQ, as well as securities dealers engaging in securities transactions involving U.S companies or trading in U.S. markets.
b.
The SEC’s reach does not extend to securities issued by non-U.S. companies that are traded exclusively in non-U.S. markets. Its registration and reporting rules do not apply to short-term commercial paper or securities issued by federal, state, or local U.S. governments.
c.
Securities issued by banks, savings and loans, and not-for-profit organizations are not subject to SEC requirements for issuance of new securities, but are subject to SEC periodic reporting requirements.
Test Bank, Chapter 16
©Cambridge Business Publishers, 2023 16-27
4.
Topic: Securities legislation LO 1 Below is a list of federal securities laws administered by the SEC. Required For each securities law listed, select the description that applies. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n)
Securities Act of 1933 Securities Act of 1934 Public Utility Holding Company Act of 1935 Trust Indenture Act of 1939 Investment Company Act of 1940 Investment Advisers Act of 1940 Securities Investor Protection Act of 1970 Foreign Corrupt Practices Act of 1977 Insider Trading Sanctions Act of 1984 Private Securities Litigation Reform Act of 1995 Sarbanes-Oxley Act of 2002 Emergency Economic Stabilization Act of 2008 Dodd-Frank Act of 2010 Jumpstart Our Business Startups Act of 2012
Requires public utility holding companies to register with the SEC. Regulates open-end mutual funds. Governs trading in securities once they are issued and outstanding. Insures customer accounts held by brokers. Regulates the public offering of securities, generally prohibiting the offering and sale of securities unless they are registered with the government. Requires a formal agreement specifying the rights of bondholders. Requires that those who provide paid advice to the public concerning securities must register with the SEC. Exempts emerging growth companies from certain SOX reporting requirements. The SEC can seek fines of up to three times the profits gained from illegal activities covered by this regulation. Reminds the SEC of its ability to suspend or modify accounting standards. Substantially expanded the SEC’s role in monitoring financial services markets. Requires companies to maintain accurate accounting records and maintain a system of effective internal accounting controls. Requires auditor evaluation of internal controls and management certification of financial statements filed with the SEC. Provides protection against lawsuits stemming from certain financial statement predictions.
©Cambridge Business Publishers, 2023 16-28
Advanced Accounting,5th Edition
ANS: e c a f b g d l i n m j k h 5.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)
Securities Act of 1933 Securities Act of 1934 Public Utility Holding Company Act of 1935 Trust Indenture Act of 1939 Investment Company Act of 1940 Investment Advisers Act of 1940 Securities Investor Protection Act of 1970 Foreign Corrupt Practices Act of 1977 Insider Trading Sanctions Act of 1984 Private Securities Litigation Reform Act of 1995 Sarbanes-Oxley Act of 2002 Emergency Economic Stabilization Act of 2008 Dodd-Frank Act of 2010 Jumpstart Our Business Startups Act of 2012
Topic: Organization and structure of the SEC LO 2 The SEC is organized into five divisions. Required a. Which division is most frequently encountered by those in the accounting profession? b. Name each division and its major responsibilities. ANS: a. b.
Division of Corporation Finance 1. 2. 3. 4. 5.
Test Bank, Chapter 16
The Division of Corporation Finance administers the disclosure requirements of the securities laws. It processes and reviews registration statements and periodic filings of quarterly and annual reports. The Division of Enforcement investigates possible violations by market participants and makes recommendations to the Justice Department concerning administrative proceedings and criminal prosecution. The Division of Trading and Markets oversees the operations of secondary securities markets, and monitors trading activities and stock market operations. The Division of Investment Management regulates sales practices, advertising, and new products of mutual funds and exchange-traded funds. The Division of Economic and Risk Analysis supports all SEC activities through identification of new market practices, issues and concerns, and uses economic modeling and data analytics to evaluate SEC initiatives.
©Cambridge Business Publishers, 2023 16-29
6.
Topic: Chief Accountant of the SEC LO 2 The SEC staff office best known to accountants is that of the Chief Accountant of the SEC. Required Briefly list the major responsibilities of the Chief Accountant of the SEC. ANS: • • • • •
7.
Supervises the preparation of SEC accounting and auditing pronouncements. Reviews Division of Enforcement investigations of questionable accounting and auditing practices. Serves as the link between the SEC and the accounting profession. Has oversight powers over the FASB and the PCAOB. Communicates SEC views on accounting and auditing-related matters.
Topic: Organization and structure of the SEC LO 2, 6 The SEC’s Division of Economic and Risk Analysis uses Corporate Issuer Risk Assessment to identify filings that are most likely to exhibit earnings management. Required a. Briefly discuss how changes in reporting standards may have increased the potential for reporting misleading information. Provide a specific example. b. How has the information environment increased the SEC’s ability to use quantitative models to flag suspicious filings? c. Identify four financial ratios that could be used to identify potential earnings management. ANS: a.
b.
New reporting standards increasingly are more principles-based and involve significant professional judgment. The accuracy and appropriateness of these judgments are difficult to evaluate. Examples include revenue recognition, goodwill impairment testing, the consolidation decision, and many others. Electronic filing of required SEC reports creates a large database that can be used to generate statistics as well as compare data across industries and companies. Data analytics techniques have proliferated in recent years, providing increased ability to identify areas of possible concern.
©Cambridge Business Publishers, 2023 16-30
Advanced Accounting,5th Edition
c.
8.
Useful ratios are those that focus on areas of reporting that require the most judgments or where it is most difficult for an auditor to identify inappropriate judgments. Examples include: •
Long-term assets to total assets. Long-term assets, particularly financial instruments, identifiable intangible assets, and goodwill, are subject to judgments regarding initial valuation, unrealized changes in value, and impairment. A high ratio may also indicate inappropriate capitalization of costs, which can overstate income.
•
Accounting income to taxable income. Judgments may be used to inflate reported income, while the motivation with taxable income is to minimize tax payments.
•
Accounting income to cash from operating activities. Accounting income is subject to accrual-based judgments, such as unrealized gains and losses, estimated bad debts, and impairment testing. Operating cash flow is not completely immune from judgments, in particular involving categorization as operating, investing, or financing, but is certainly subject to fewer judgments than accounting income.
•
Ratios specific to particular financial balances, such as bad debt expense to receivables, or impairment losses to related assets. Deviations from the average over time or from the average for companies in the same industry may indicate inappropriate accounting judgments.
Topic: Organization and structure of the SEC LO 2 The SEC communicates its views on accounting and audit-related matters using various types of formal published pronouncements, private rulings and informal statements. Required Identify the three types of formal publications the SEC uses to communicate its rulings on accounting and auditing-related matters and identify which type of publication is the highest authority on accounting principles for publicly traded companies. ANS: Financial Reporting Releases are the highest-ranking authoritative source of accounting principles for public companies. Staff Accounting Bulletins state the SEC staff’s current position on specific accounting issues. Accounting and Auditing Enforcement Releases report disciplinary and enforcement actions against those whose conduct affects a company’s reported financial information.
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9.
Topic: Registration of new securities LO 3 The Securities Act of 1933 regulates issuance of new public offerings. Required Fill in the blanks in the following statements about registration of new securities. a.
b.
c. d. e. f. g. h. ANS: a. b. c. d. e. f. g. h.
Form _____ is the basic form for the registration of new issues. Issuers meeting specified criteria may use short Form _____. Securities issued in business combinations and debt exchanges are registered using Form _____. Financial data presented in a registration statement include balance sheets as of the end of the last ____ years, statements of income and comprehensive income and statements of cash flows for the last _____ year(s), and summaries of operations for the past _____ year(s). The period from the last audited statement to the date of the most recent interim period ending before the registration statement is known as the ______ period. Accountants often write a(n) _______________ providing negative assurance on unaudited financial statement information contained in the registration statement. A(n) ______________ underwriting means that the underwriter buys the entire issue at a fixed price and is responsible for selling the issue to dealers. A(n)_____________ underwriting means that the underwriter sells as many shares as possible, receiving a commission based on sales. A(n) _______________ underwriting is used if the issuing company wants to ensure that enough capital is raised to sustain the project for which the securities are being sold. An alternative to the traditional IPO is a ___________, where securities are sold to investors without the services of an underwriter. S-1, S-3, S-4 two, three, five stub comfort letter firm commitment best efforts all-or-none direct listing
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10.
Topic: Periodic reporting requirements (Form 10-K) LO 4 The SEC prescribes the content of Form 10-K, the required annual report for filers. Required List seven items of disclosure required in the 10-K report, other than the financial statements and supplementary financial information. ANS: The seven can be chosen from this group: Description of business Risk factors Unresolved staff comments Description of properties Legal proceedings Mine safety disclosures Stock prices and dividends Management's discussion and analysis Quantitative and qualitative disclosures about market risk Changes in and disagreements with accountants Controls and procedures Directors and executive officers Executive compensation and transactions Security ownership by certain beneficial owners and management Certain relationships and related-party transactions Principal accountant fees and services
Test Bank, Chapter 16
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11.
Topic: Periodic reporting requirements (MD&A) LO 4 Item 7 of Form 10-K describes the content of management’s discussion and analysis (MD&A). SEC requirements for MD&A have changed in recent years. Required a. Why did the SEC modify MD&A requirements? b. Identify three of the content areas of MD&A expected to be in a registrant’s 10-K report and describe the general content of each area. ANS: a.
b.
Modifications were made to eliminate duplicate and immaterial information, and provide greater flexibility in communicating information to investors. The goal is to improve the usefulness of information to investors, and reduce costs of providing that information. Management's discussion and analysis consists of management’s analytical commentary on the company's current and future financial condition. The format is flexible, rather than requiring a structured list of topics and facts. Topics include: Liquidity and capital resources Short- and long-term cash requirements, ability to generate necessary cash flow, and expected sources of cash. Material changes Explanation of material changes in financial statement line items. Off-balance-sheet arrangements Material obligations and contractual arrangements not reported on the balance sheet. Critical accounting estimates Impact of uncertainty on financial condition, changes in estimates.
12.
Topic: Periodic reporting requirements (MD&A) Historically, 10-K requirements for disclosures of off-balance-sheet arrangements were to include them in a separate item, in a specified tabular format. Required a. Provide two examples of off-balance-sheet arrangements. b. Under the new rules, where are off-balance-sheet arrangements disclosed in the 10-K? Why do you think the rules were changed? ANS: a.
b.
Possible examples include contractual arrangements to provide future goods or services to customers, and contingent obligations from arrangements with unconsolidated entities with a material current or future effect on financial condition. The new rules require integration of this information throughout MD&A. Logical categorization would be in the liquidity and capital resources area. The change in requirements allows management to focus on important information in the appropriate context. The more flexible format also reduces duplication of disclosures already required to appear in the financial statements.
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13.
Topic: Periodic reporting requirements (MD&A) LO 4 Item 7A in Form 10-K requires disclosure of a company’s likely exposure to market risk. Required a. Item 7A focuses on particular company investments that expose it to market risk. Describe these investments and explain the types of market risk they create. b. Describe the disclosures required in Item 7A, including the three alternative approaches that may be used to estimate and communicate market risk. ANS: a.
b.
Item 7A helps financial statement users assess the reasons that companies use derivative financial instruments, and the likely exposure to market risk created by companies’ positions in derivatives and other financial instruments. Market risk is the risk of loss from adverse movements in interest rates, exchange rates, and market prices. Derivatives and other financial instruments are categorized as those entered into for trading purposes and for purposes other than trading. The three alternative approaches for estimating and communicating market risk are: 1. 2. 3.
Test Bank, Chapter 16
Tabular presentation of estimated fair values and expected cash flows of derivatives and other financial instruments, by expected maturity date. Sensitivity analysis, which estimates potential losses in future cash flows, earnings, or fair values from hypothetical changes of at least 10% in relevant interest rates, exchange rates, or market prices. Value at risk (VaR), which estimates the maximum potential loss that has a selected likelihood of occurrence for a selected time period.
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14.
Topic: Periodic reporting requirements (market risk) LO 4 The following table is presented in Item 7A of Microsoft Corporation’s fiscal 2021 Form 10-K.
Required a. Which of the three methods of communicating market risk does Microsoft use? b. Explain, in words, the major areas of market risk that Microsoft is exposed to. c. Explain, in words, what the table tells us about Microsoft’s market risk. ANS: a.
Microsoft uses sensitivity analysis, which estimates potential losses in future cash flows, earnings, or fair values from hypothetical changes of at least 10% in relevant interest rates, exchange rates, or market prices.
b.
The first two areas of market risk deal with changes in foreign currency rates. Microsoft will incur losses on foreign-currency-denominated sales and investments if the U.S. dollar strengthens. The third and fourth areas deal with the impact of rising interest rates on its fixed income investments—if interest rates rise, the value of debt investments falls. The last area shows the impact of falling equity market prices on its equity investments.
c.
The table estimates the impact on earnings or fair values of a 10% negative change in interest rates, foreign exchange rates, or equity prices. For example, if the average foreign exchange rate to which Microsoft is exposed (U.S. dollar/foreign currency unit) falls 10%, Microsft’s earnings will fall by $6,756 million. If market prices of Microsoft’s equity investments fall 10%, its earnings will fall by $602 million.
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15.
Topic: Periodic reporting requirements (market risk) LO 4 The following table is presented in Item 7A of Walt Disney Company’s fiscal 2021 Form 10-K. Disney uses a one-day VAR model with a 95% confidence level.
Required a. Explain the market risk inherent in each of Disney’s four risk categories for its financial instruments. b. Disney reports a VAR statistic of $44 million as of fiscal 2021 year-end for its currency sensitive financial instruments. Explain what this means. Can we conclude that Disney incurred a loss of $44 million due to exposure to foreign currency risk during fiscal 2021? Why or why not? c. Disney reports a total one-day VAR of $364 million at the end of fiscal 2021. However, the total VAR for the four risk categories is $439 million. What causes the discrepancy between these two numbers? ANS: a.
Interest rate risk may mean several things, including the risk that market interest rates will change on variable rate debt, or that fixed income investments will change in value due to changes in market interest rates. Currency risk is the risk that the U.S. dollar value of transactions denominated in other currencies will change, or that financial assets/liabilities denominated in other currencies will change in dollar value. Equity risk relates to changes in the value of investments in equity securities due to changing market prices. Commodity risk relates to changes in the value of investments hedging the cost of commodities, such as metals, due to changing market prices. It could also relate to potential changes in the price of hedges of forecasted transactions involving commodities.
b.
A one-day VAR of $44 million for foreign currency risk means that 95% of the time, the maximum expected one-day loss due to exposure to foreign currency risk is $44 million. In other words, this loss amount would be exceeded with a probability of 5%. This amount is based on expectations regarding changes in relevant rates and represents an estimate of potential losses. It does not represent actual losses reported in the financial statements.
c.
The total VAR is less than the sum of the individual VARs because of offsetting effects of the different categories. In some cases, potential losses due to interest rate risk, for example, may be offset by potential gains due to equity risk. This is called the diversification or portfolio effect.
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16.
Topic: Regulation S-X: Auditor Enforcement Proceedings LO 4 The SEC’s Division of Enforcement brings action against auditors exhibiting “improper professional conduct” as outlined in Rule 102(e) of the SEC’s Rules of Practice. Required a. Identify the circumstances that are considered to be “improper professional conduct” per Rule 102(e). b. Several actions were taken against auditors of banks as a result of the credit crisis of 2008, with proceedings continuing for several years thereafter. These banks eventually failed or lost significant value subsequent to the audits. Examples include TierOne Bank and Orrstown Financial Services, Inc. Explain what improper professional conduct is likely to have occurred in audits of these banks. ANS: a.
Rule 102(e) specifies three circumstances of improper professional conduct: • • •
b.
Intentional or knowing conduct, including reckless conduct. A single instance of highly unreasonable conduct resulting from violation of professional standards, where the accountant should know that heightened scrutiny is warranted. Repeated instances of unreasonable conduct in violation of professional standards, indicating lack of competence.
Banks had financial difficulties during the credit crisis and beyond, due to investment in subprime mortgages (lending to high-risk companies and individuals). This behavior should have resulted in the reporting of significant expected loan losses, following GAAP. The audits likely did not identify deficiencies in loan loss estimates or require changes in the loss estimates prepared by bank management. Any impact of the bank’s questionable loan procedures on its future performance was also overlooked and therefore not communicated to investors.
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17.
Topic: Regulation S-X: SEC recognition of accounting standards LO 4 The SEC has statutory authority to set accounting principles for the financial information required in company filings. Required a. Are the accounting principles required for SEC filings the same as generally accepted accounting principles issued by the FASB? Explain. b. Which Act authorizes the SEC to recognize accounting principles of standard-setting organizations? What general criteria must these organizations meet before the SEC will consider recognizing their standards? c. Assume a company headquartered in Brazil has its stock listed on a U.S. stock exchange. Is it required to follow the same accounting standards as U.S. companies in preparing periodic financial reports? Explain. ANS: a.
Section 101 of the SEC’s Codification of Financial Reporting Policies endorses FASB standards (GAAP). If the SEC and FASB do not agree on how to report a particular transaction or issue, they generally work together to develop a standard both will accept. The SEC often requires additional disclosures not specified by GAAP. However, these disclosures are included in the FASB’s reporting taxonomies, available online.
b.
Section 108 of the Sarbanes-Oxley Act authorizes the SEC to accept as generally accepted the standards of any organization meeting specific requirements. These requirements include independence, adequate funding, and the ability to identify and consider important issues on a timely basis.
c.
If the company follows full (official) IFRS, it may file its financial statements without any reconciliations to U.S. GAAP. If the company does not use official IFRS, the financial statements must include a reconciliation of reported income and shareholders’ equity to GAAP. The financial statements themselves are not required to be prepared following GAAP.
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18.
Topic: Form 8-K LO 4 The SEC requires that registrants file a special report, known as Form 8-K, within four days after the occurrence of events significant to investors. Required a. Identify five types of events that would require a company to file Form 8-K. b. Describe a widely publicized event in the recent news that would require a listed company to file a Form 8-K. ANS: a.
The list of types of events is found in Exhibit 16.3 of the text. Common subjects of a Form 8-K filing include: • • • • • •
b.
Bankruptcy or receivership Business acquisition Creation of an off-balance-sheet financial obligation Material impairments Change in control Departure or appointment of directors and officers
The answer to this question depends on what is happening in recent news. The text identifies Equifax Inc.’s data breach. Other listed companies have had data breaches as well, including Yahoo!, Target Corporation, Navistar International and 10x Genomics.
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19.
Topic: SEC comment letters LO 4, 6 The SEC regularly monitors a company’s filings of periodic reports, to ensure compliance with disclosure and accounting standards. Required a. Which SEC division is responsible for monitoring periodic reports? How often is the SEC required to review a registered company’s filings? Which Act sets this requirement? b. In recent years, common reporting issues discussed in comment letters are the use of non-GAAP measures and fair value measurements. Explain why the SEC emphasizes these two issues in its comment letters. c. Identify an additional reporting issue that is likely to become a popular subject of comment letters in the future and explain your choice. ANS: a.
b.
Division of Corporation Finance At least every three years Sarbanes-Oxley Act of 2002 Use of non-GAAP measures has proliferated again in recent years, after declining in the early 2000s due to various well-publicized reporting scandals. These measures can provide useful information to investors on aspects of company performance deemed to be more accurate than GAAP measures. However, they are also subject to significant judgment and potential manipulation, as management may omit certain expenses to enhance performance. The SEC has specific regulations regarding the use of non-GAAP measures but allows considerable flexibility on what to include or omit from the measure. Comment letters commonly question the choices a company makes in reporting these measures and ask for specific justification of these choices. In some cases the company may be in violation of SEC regulations. Fair value measurements are pervasive in the financial reports, for impairment testing, valuation of acquired businesses, determination of unrealized gains and losses, and other areas. A large proportion of fair value measurements are at level 3, which usually involves the use of discounted cash flow to measure value. Choice of estimates of future cash flow and the discount rates used are subject to management judgment and can easily be manipulated to enhance company performance. Even small changes in estimated cash flows or discount rates can have significant effects on fair value measurements.
c.
There is no right answer to this question, but evidence indicates that the new revenue recognition standard will result in a significant increase in comment letters. Revenue recognition choices can have a major impact on a company’s bottom line, especially for companies with bundled goods and services. Examples include companies in the telecommunications and automotive industries. Students may also mention the new leasing standard, which may result in new techniques to keep leases off the balance sheet, and the loss recognition standard for financial instruments, which requires estimates of expected losses for the life of the investment.
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20.
Topic: Proxy statements LO 5 A publicly traded company sends out a proxy statement each year, prior to its annual meeting of the shareholders. Required Explain the purpose of the proxy statement and identify four possible topics it will contain. ANS: A proxy statement is a communication by a company to its shareholders, advising them of matters for shareholder action and procedures for voting. Possible topics include: a. b. c. d. e. f. g.
21.
Election of officers Appointment of independent auditor Change in corporate charter or bylaws Issuance of new securities Approval of business combination Other shareholder proposals, including those not supported by management Information on nonvoting matters, such as: (1) Board committees (2) Litigation (3) Management compensation plans and compensation amounts (4) Related-party transactions
Topic: Corporate accountability and governance (PCAOB) LO 5 A major provision of the Sarbanes-Oxley Act established the Public Accounting Oversight Board (PCAOB). Required Describe the major duties of the PCAOB. ANS: The PCAOB sets auditing and attestation standards, quality control standards, and ethics standards for registered public accounting firms, i.e. firms that audit companies whose securities are publicly traded in the U.S. The PCAOB conducts inspections of auditing firms, develops rules related to auditor independence and audit procedures, and disciplines those who violate the rules.
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22.
Topic: Auditor requirements and disclosures LO 5 The Sarbanes-Oxley Act’s provisions address auditor independence and potential conflicts of interest. Required a. What are the specific SOX provisions that address auditor independence and conflicts of interest? b. What are the specific disclosure requirements related to the audit report? ANS: a.
b.
23.
Section 201 prohibits auditors from providing non-audit services such as bookkeeping, internal audit, design and installation of information systems, and other services that result in the auditor evaluating their own work. The lead engagement partner and concurring audit partner must be rotated every five years to avoid potential conflicts of interest caused by overfamiliarity with management. The PCAOB requires disclosure of audit firm tenure and discussion of critical audit matters. The audit report is standardized by section, and the audit opinion must appear in the first section of the report. Exact wording is specified for descriptions of auditor independence, auditor responsibilities, and the nature of the audit.
Topic: Audit committees LO 5 Discuss the main purpose of an audit committee, its major activities, and any constraints on its membership. ANS: The main purpose of an audit committee is to ensure that management fulfills its responsibilities for accounting, reporting, controlling operations, and safeguarding assets. Major activities of the audit committee are: • • •
Monitors and is actively involved with the financial accounting and reporting system and the external and internal audit functions. Hires and has direct responsibility for arrangements with and oversight of the external audit firm. Approves fees for audit and non-audit services.
The CEO cannot serve on the audit committee. Members of the audit committee cannot be members of the nominating or compensation committees. Members must be independent. They cannot be current or prior employees or have other insider relationships.
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24.
Topic: The Dodd-Frank Act LO 5 Congress passed the Dodd-Frank Act of 2010 in response to the credit crisis of 2008. It increases regulation and monitoring of the financial services industry, as well as providing measures to improve consumer protection. Required a. Name three new regulatory agencies created as a result of the Dodd-Frank Act, and the purpose of each agency. b. Identify one provision of the Act that affects the activities of banking entities, and one provision that affects public companies. ANS: a. • • • b.
Provisions of the Dodd-Frank Act created three new agencies: Financial Stability Oversight Council monitors the financial system and identifies and neutralizes financial risks. Bureau of Consumer Financial Protection works to ensure that consumers receive information they need to make informed decisions regarding financial services and protects consumers from abusive and deceptive practices. Office of Credit Rating Agencies monitors and regulates credit rating agencies. Trading and service limits were placed on banking entities, to avoid speculative investment practices. The Act also provides for new governance regulations affecting all public companies, in particular involving compensation policies. Required disclosures include incentive compensation policies, clawback provisions related to accounting restatements, and a comparison of CEO pay to that of the median company employee.
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25.
Topic: Non-GAAP performance measures LO 6 The use of non-GAAP measures of performance in SEC filings has consistently topped the list of issues addressed in SEC comment letters. Required a. Why is the SEC concerned about the use of non-GAAP performance measures? b. Identify at least three areas where the SEC might focus its concerns about a company’s non-GAAP performance measure. ANS: a.
b.
The SEC is concerned that investors may be misled concerning a company’s financial performance. Focusing on a non-GAAP measure omits various aspects of performance and is subject to management judgment. Possible issues: • • • • •
26.
The non-GAAP measure is displayed with equal or greater prominence than the most directly comparable GAAP financial measure. The non-GAAP measure is not reconciled to the most comparable GAAP financial measure. It is not clear that the adjustments to eliminate or smooth items are appropriate. Use of non-GAAP measures that are different from those used by other companies in the industry. Changes in the way non-GAAP measures are calculated.
Topic: Initial public offerings LO 3, 6 Most companies use a traditional IPO to list their stock on the national exchanges. Recently two alternative methods, direct listing and use of a special purpose acquisition company (SPAC), have become popular. Required For each method, explain the procedures involved, and identify at least two benefits compared with a traditional IPO. ANS: In a direct listing, the company sells shares directly to the public without the use of an underwriter. Benefits include avoidance of underwriting fees, and initial increases in share price benefit the company, rather than the institutional investors that are generally offered the shares prior to the offering to the general public in a traditional IPO. An SPAC is a shell company that does an IPO to list on the public exchanges. Its purpose is to accumulate cash from investors and search for a merger with a private company. The private company then goes public through the merger. Benefits include lower risk to investors, more accurate pricing of the private company, and quicker SEC approval.
Test Bank, Chapter 16
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27.
Topic: Critical audit matters LO 5 The PCAOB requires that auditors of SEC filings disclose “critical audit matters,” or CAMs, connected with the audit. Required a. What are the attributes of a CAM? b. Provide two examples of CAMs. ANS: a.
b.
28.
A CAM is an issue that arises during the financial statement audit that was communicated or required to be communicated to the audit committee. The issue must relate to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment. Examples include an inability to access information needed to assess material financial information, additional procedures needed to verify fair value measurements such as those used to test goodwill impairment, additional procedures needed to investigate the appropriateness of revenue recognition procedures, and lack of adequate internal controls over recorded amounts provided by third parties.
Topic: ESG disclosures LO 6 The SEC is expanding requirements to disclose a company’s environmental, social, and governance (ESG) impact and activities in its SEC filings. Required a. Why do you think the SEC is taking a greater interest in ESG disclosures? b. Have any disclosure requirements been in place prior to 2020? Explain. c. What are the main purposes of ESG disclosures, from the SEC’s viewpoint? d. What are two areas of company’s 10-K that will most likely contain disclosures related to ESG and climate change? ANS: a.
Companies have taken a greater interest in ESG projects, which should be disclosed to investors. Investors are increasingly interested in a company’s ESG activities and demand information on progress and achievement of goals. Consumers of company products and services are putting greater emphasis on the company’s ESG activities.
b.
The SEC has had specific guidance in place for disclosure of climate change risks and activities since 2010.
c.
The SEC evaluates the accuracy of disclosures, the existence of internal controls to support provision of accurate information, and procedures to communicate ESG information to management responsible for ESG decisions and top management responsible for certifying SEC filings.
d.
Two likely places for ESG and climate change disclosures are Item 1A, risk factors, and Item 7, MD&A.
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